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?