ECON 101 Lecture Notes - Lecture 2: Interest Rate, Reserve Requirement, Open Market Operation
Economics 101
Lori Leachman
Part 2 ā¢ Lecture
ā¢ Controlling money supply for Fiat money
o Federal reserve is Central bank
āŖ System of banks (pyramid form)
ā¢ Top : ruling and policy making entities (board of gov. & OM committee)
ā¢ Mid: regional fed. Reserve banks
ā¢ Low: private banks (members of federal reserve - only large national banks)
o Bank of america, wells fargo
āŖ Ruling and policy making entities
ā¢ Board of Governors - 7 members appointed (not elected, nominated by
president and vetted by Senate) - determine policy
o 14 year term - one term expires every two years (only one term)
āŖ Staggered expiration
ā¢ More continuous policies
o President can appoint 2 members per presidential term (4 years)
āŖ 2 terms - 8 years - 4 members - majority
āŖ Removes fed from political influences**
o Chairman appointed 2nd year of presidential term - 4 years term (of the
7 members)
āŖ Spans presidential terms - smooth transition between
presidencies; more continuity; long term focused (less short
term and political)
o Federal reserve does not go to congress or senate for funding - does not
need appropriations from exec. Legist. branch
āŖ Monetary policy is depoliticized and focused on long term -
target inflation w/ eye to unemployment and growth
āŖ Open market committee - implements policy - decides how to engage in OMO*
ā¢ Composed of the board of governors and the 4 regional federal reserve bank
presidents and chairman of federal reserve bank of NY (very powerful position)
- 12 positions total
o All policies start in NY bank (financial center)*
o Regional presidents rotate between states within regions
ā¢ Implements policy
o Decides how to engage/conduct in open market operations
o Federal reserve buying and selling bonds
āŖ This actually affects interest rate changes, money supply
changes... etc
āŖ Constantly selling - people cant tell if fed is net buyer or
seller... cant take advantage
ā¢ OMO -> Interest rate changes, money supply changes
ā¢ 2 advisory councils
o Bankers advisory council - private sector banks
o Thrifts advisory council - advisory & honorary
āŖ Provide feedback and input on private sector sentiment
āŖ The fed taps pulse of private sector
ā¢ Updates and info/advice
o Both depository institutions - accept deposits and grant loans
āŖ Banks mostly served business community (corporate lending)
- depository + investment
āŖ Thrifts mostly served consumer market (personal, housing
market...etc) - home mortgage loans, consumer credit -
savings, loans, credit unions, mutual savings
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Part 2 lecture: controlling money supply for fiat money, federal reserve is central bank, system of banks (pyramid form, top : ruling and policy making entities (board of gov. 2 terms - 8 years - 4 members - majority: removes fed from political influences*, chairman appointed 2nd year of presidential term - 4 years term (of the. 7 members: spans presidential terms - smooth transition between presidencies; more continuity; long term focused (less short term and political, federal reserve does not go to congress or senate for funding - does not need appropriations from exec. 12 positions total: all policies start in ny bank (financial center), regional presidents rotate between states within regions. Depository + investment: thrifts mostly served consumer market (personal, housing marketetc) - home mortgage loans, consumer credit - savings, loans, credit unions, mutual savings, much similar now (drmca 1980, regional banks - 12 spread across us, mostly on east coast (historically financial center, set up in.