Key Terms
Board of Governors
7 members. Appointed by the President, confirmed by the Senate.
Fed Chair
One Board member designated as Chair. First among equals — one vote, but controls the agenda and is the public voice of
Congress created two strategies to stop bank runs
Deposit insurance and lender of last resort.
Deposit insurance
The FDIC (Federal Deposit Insurance Corporation) insures depositors up to $250,000 per account per bank. Banks pay premi
Real examples
1987 stock market crash (Fed made emergency short-term loans); 2008-2009 recession (quantitative easing functioned as le
Three traditional tools
1. Discount rate 2.
Logic
If the discount rate rises, borrowing from the Fed becomes more expensive; banks borrow less from the Fed and must call
Raise reserve requirement
Banks hold more, lend less; credit tightens.
Lower reserve requirement
Banks hold less, lend more; credit loosens.
HOW A BOND PURCHASE WORKS (expansionary)
The Fed buys Treasury bonds from a bank. The bank's bond holdings fall; its reserves rise by the same amount.
Example
Fed buys $20 million in bonds; reserve requirement = 10%. Money multiplier = 10.
HOW A BOND SALE WORKS (contractionary)
Bank buys bonds from the Fed. Bank's reserves fall.
Expansionary (loose) monetary policy
Increases money supply; reduces interest rates; stimulates borrowing, investment, and consumption.
Contractionary (tight) monetary policy
Decreases money supply; raises interest rates; cools inflation.
Federal funds rate
Overnight interbank rate. The Fed's direct target.