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ECON 311 (1)
Chapter 13-14

ECON 311 Chapter 13-14: ECON 311 Final Exam Review

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ECON 311
Wen- Yao Wang

Chapter 13: Central Banks and the Federal Reserve System ● Structure of the Fed Reserve (p.293) ○ Writers of the Fed Reserve Act wanted to diffuse power between private sector and government, among bankers, business, and the public ■ Resulted in evolution of Fed Reserve System to include: ● Federal Reserve Banks ● Board of Governors and the Federal Reserve System ● Federal Open Market Committee (FOMC) ● Federal Reserve (FR) Banks - p.294 ○ Each of twelve FR districts has one main Fed Reserve Bank ○ Three largest hold more than 50% of assets (discount loans, securities, other holdings) ■ New York ■ Chicago ■ San Francisco ○ NY most important because ■ 1: Its district contains many of the largest commercial banks in the U.S. ■ 2: Its active involvement in the bond and foreign exchange markets ■ 3: Only FR Bank to be a member of the Bank for International Settlements ○ Each of the FR Banks is a quasi-public institution owned by private commercial banks in its district that are members of FR System ○ The twelve FR Banks are involved in monetary policy in several ways: ■ Directors “establish” the discount rate ■ Decide which banks, member and nonmember alike, can obtain discount loans from the FR Bank ■ Directors select one commercial banker from each district to serve on Fed Advisory Council ■ Five of the twelve bank presidents have a vote on the FOMC, which directs open market operations (the purchase and sale of gov’t securities that affect both int rates and amount of reserves in banking system) ○ The twelve FR Banks also perform following functions: ■ Issue new currency/withdraw damaged ■ administer/make discount loans to banks in other districts ■ Act as liaisons between biz community and FR System ● Board of Governors (BoG) of the FR System - p.298 ○ Head of the FR System ○ Seven-members ■ Governors (many pro economists) are required to come from different FR districts ○ BoG involved in monetary policy in following ways: ■ All 7 gov’s are members of FOMC and vote on OM operations ● Because only 12 voters on FR Committee, BoG has majority ■ Sets reserve requirements ■ Controls fixed amount by which the discount rate exceeds the federal funds rate target ● It approves or disapproves the discount rate “established” by FR Banks ■ Advises the president on economic policy ● Federal Open Market Committee (FOMC) - p.298 ○ Meets 8 times a year ■ Seven on BoG ■ Pres of NY FRB ■ Pres’s of four other FRB ■ Secretary of FOMC ○
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