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4/10 Lecture Macro - final (Ch. 24 & asgn)

  • Introduction to the Federal Reserve

    • Established to manage monetary policy in the U.S.
    • Map of Federal Reserve districts: there are 12 districts, each serving a different region in the U.S.

  • Federal Deposit Insurance Corporation (FDIC)

    • Established by Congress in 1934.
    • Ensures bank deposits up to $250,000.
    • Minimal risk for depositors; government guarantees refunds.
    • Exceptions exist if depositor balances exceed $250,000 or if the bank fails completely.

  • Federal Reserve Regions and Geography

    • Example: The presenter relates their region to the Federal Reserve Bank of Atlanta.
    • Discussion includes how geographical boundaries have evolved over time due to historical events like the Civil War.

  • Exam Preparation

    • Test consists of 29 multiple choice and 1 short answer question.
    • Syllabus covers definitions and conceptual understanding rather than complex math.
    • The exam focuses on the Federal Reserve's actions during economic recessions and fiscal policies.

  • Monetary Policy Tools of the Federal Reserve

    • Open Market Operations:

    • Buying or selling U.S. Treasury securities.

    • Expansionary Monetary Policy:

      • Buying securities increases money supply.

    • Contractionary Monetary Policy:

      • Selling securities decreases money supply.

    • Types of Treasury securities:

      • Treasury Bills (short-term, maturing in 1 year or less)
      • Treasury Notes (medium-term, maturing in 2-10 years)
      • Treasury Bonds (long-term, maturing in approximately 30 years)

    • Discount Rate:

    • Interest rate charged to banks for loans.

    • Lowering the discount rate encourages borrowing/investment.

    • Raising the discount rate discourages borrowing.

    • Reserve Requirements:

    • Minimum reserve ratio banks must keep.

    • Currently at 0%, meaning banks can lend all deposits.

    • Lowering reserve requirements increases money supply.

    • Raising reserve requirements decreases money supply.

  • Economic Cycles

    • Recession:

    • High unemployment and slow economic activity.

    • Federal Reserve intervenes to increase money supply and lower interest rates to combat recession.

    • Inflation:

    • Occurs when money supply grows faster than real GDP.

    • Federal Reserve may tighten money supply to combat inflation.

  • Quantity Theory of Money

    • Equation: MV = PY
    • Where:
      • M = Money supply
      • V = Velocity of money
      • P = Price level
      • Y = Real GDP
    • Growth rates can be expressed:
    • Gm + Gv = Gp + Gy
    • Main takeaway:
    • If the money supply grows faster than real GDP, inflation results.

  • Recent Historical Example of Hyperinflation

    • Zimbabwe's hyperinflation:
    • Over 15 billion percent inflation at one point.
    • Example of currency losing value due to excessive money printing.

  • Conclusion

    • Understanding the tools of the Federal Reserve and their impacts on the economy is crucial for the exam.
    • Review questions on the Federal Reserve's objectives and monetary policy impacts as they relate to recession recovery and inflation concerns.

  • Test Preparation: Key Questions

    • Why was the Federal Reserve established?
    • How much can a bank loan out given a specific deposit and reserve ratio?
    • According to the quantity theory of money, what factors influence inflation rates?