BF Unit 5 specific notes

• Types of Unemployment

  • Frictional: 

    • in-between jobs or just entering the labor force (just out of college)

  • Structural:

    • when you have skills that don’t match an available job

  • Cyclical: 

    • people are getting laid off and companies can’t afford to pay employees

      • The bad kind

The Role of the Federal Reserve

• Influence interest rates

  • Sets the Targeted federal funds rate/ federal funds rate

    • Money supply (drives everything)

      • Federal Funds Rate Definition: the interest rate that banks charge each other to borrow and lend money overnight

  What is the difference between…

  • U.S. Treasury

    • Prints money

    • IRS…collects taxes

    • Finances Gov’t Debt

  • Federal Reserve

    • Purpose: to control the supply of money to achieve…

      • Stable prices

      • Full employment

      • Economic growth

• Structure of the Federal Reserve

  • Head of the Fed = Jerome Powell

  • Board of Governors

    • 7 Boards of Governors

      • 14-year terms

      • The president nominates them, but the Senate needs to confirm them

  • Twelve district banks

    • 1 for each region of the country

    • 7 governors + 5 other district banks

  • Federal Open Market Committee (FOMC)

    • Voters (12 total voters, vote 8 times a year)

      • 7 governors

      • 1 NY district bank

      • The other 4 district banks rotate 

    • Vote on federal fund rate = the interest rate that banks charge each other when lending money overnight

      • Interest Rate definition: the cost of borrowing money

• Targeted federal funds rate - (def. the interest rate that banks charge each other to borrow and lend money)

  • Fed establishes a target rate

  • Fed uses open market operations to achieve target rate

• 3 ways the Fed Controls the Money Supply

  • Reserve requirement

    • Funds that banks must hold against deposit liabilities

    • Reserve Requirement Ratio (RRR)

      • Percent banks must hold against deposit liabilities

  • Discount rate

    • Rate the Federal Reserve charges banks to borrow reserves

      • Federal Reserve lends you money are an interest rate

  • Open market operations (OMO)

    • Buying and selling Federal government securities

      • Securities =  bonds / treasury bills {less than a year}

    • By far, the most important tool of monetary policy
      

• Fiscal Policy

  • The federal government’s 

    • Taxation

    • Spending

    • Debt management

  • The possible impact of deficit spending of or a surplus on

    • The money supply

    • Reserves of the banking system

    • Securities prices

  • Deficit: Government spending exceeds revenues

  • Surplus: Government revenues exceed spending

• Inflation

  • Def. General increase in prices

  • Consumer Price Index (CPI)

    • Measures the rate of inflation

  • Fight inflation by…

    • Contracting the money supply

    • Raising interest rates

    • Raising taxes
      

• Deflation

  • Def. A general decline in prices

  • Opposite impact of inflation

  • Unexpected deflation hurts debtors and helps creditors

  • Associated with higher levels of unemployment