REV - Financial Sector

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Financial Sector

 

The Function of Money

  1. Medium of Exchange - is any medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coin or note, or a deposit in a checking account or other readily liquefiable account.
  2. Unit of Account – is a system of measuring the value of products as well as keeping track of the debts and loans in an economy.
  3. Store of Value – allows individuals to put money into accounts that allow growth and compensation for increases in the price level due to the time value of money.

 

Monetary Policy

Monetary Policy

  • Monetary policy is the decisions made by the Federal Reserve to influence the money supply.
  • The Board of Governors of the Federal Reserve System (“Fed”) is responsible for controlling the U.S banking system (and the money supply).
  • The Board of Governors has 7 members, appointed by the President with confirmation of the Senate.
  • The BOG directs the activities of the 12 Federal Reserve Banks, which then control the nation’s banks.
  • The Federal Open Market Committee (FOMC) is made up of the 7 members of the BoG plus 5 of the presidents of the Federal Reserve Banks.
  • The FOMC sets the Fed’s monetary policy and directs open market operations.

Tools of Monetary Policy

Three tools:

  1. Open-Market-Operations - these are the most important means the Fed as to control the money supply. It refers to the buying and selling of government bonds (securities) by the Federal Reserve Banks. Buying bonds increases the money supply; selling them decreases it.
  2. Reserve Requirements - the Fed can also increase or decrease the Reserve ratio. Increasing the Reserve ratio decreases banks’ excess reserves, causing the money supply to decrease. Decreasing it increases banks’ excess reserves, increasing the money supply. This is really powerful, and so it is not used very often.
  3. Discount Rate - the rate that Federal Reserve Banks charge for loans to commercial banks. When commercial banks borrow from FRBs, their reserves increase. Therefore, if the discount rate increases, banks are less encouraged to borrow.

 

Federal Reserve

The Board of Governors of the Federal Reserve System (“Fed”) is responsible for controlling the U.S banking system (and the money supply). The Board of Governors has seven members, appointed by the President with confirmation of the Senate. It directs the activities of the 12 Federal Reserve Banks, which then control the nation’s banks.

There are several entities that help the Board of Governors. The Federal Open Market Committee (FOMC) is made up of the 7 members of the BoG plus 5 of the presidents of the Federal Reserve Banks. It sets the Fed’s monetary policy and directs open- market operations. There are also three Advisory Councils (made of private citizens) that meet with the BoG to give their views on banking and monetary policy.

 

Watch the videos below for further review.

  

 

Review

After you have reviewed the material - try the challenge below:

 

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