AS

Federal Reserve

Introduction

  • through its influence over the money supply, the Federal Reserve has more influence over aggregate demand than any other institution
  • shifts in aggregate demand can greatly influence the economy in the short run

What is the Federal Reserve System?

  • federal reserve has the power to create money
    • doesn’t have to literally print money, it can add reserves to bank accounts held at the Federal Reserve
    • this new money can be given away or lent out in a way that increases aggregate demand
  • Federal Reserve’s most important job is to regulate the US money supply
  • Federal Reserve is the government’s bank
    • maintains the US Treasury account
    • manages government borrowing through US Treasury bonds, bills, and notes
  • Federal Reserve is also the banker’s bank
    • regulates banks and lends them money
    • manages nations payment system
    • protects financial consumers with disclosure regulations

The US Money Supplies

  • money: a widely accepted means of payment
  • most important assets that serve as means of payment in the US today:
    • currency (paper bills and coins)
    • total reserves held by banks at the Federal
    • checkable deposits (your checking or debit account)
    • savings deposits, money market mutual funds, and small-time deposits
  • liquid asset: an asset that can be used for payments or, quickly and without loss of value, can be converted into an asset that can be used for payments
    • assets differ in their degree of liquidity depending on how quickly they can be converted into an asset that can be used for payment
  • currency: coins and paper bills held by people and nonbank firms
  • a lot of US cash is used on other countries
    • Panama, Ecuador, El Salvador, and others use the US dollar as their official currency
  • dollars are often used unofficially in unstable countries as a means of preserving wealth
  • total reserves play an important role in the financial system
  • all major banks have accounts at the Federal Reserve
    • they use them to trade with other banks and the Federal Reserve itself
    • it’s not currency, but electronic claims that can be converted into currency if the bank wishes
  • checkable deposits: deposits that you can write checks on or access with a debit card
    • these are deposits used most often in making daily transactions
    • aka demand deposits
    • you can access this money “on demand”