DRAW A LINE SEPARATING TODAY & YESTERDAY1) Write: Date: 02/22/10, Topic: Federal Reserve2) On the next line, write “Opener #20” and then:

1) Plot your mood, reflect in 1 sent.2) Write down: Dow % Change, NASDAQ % Change, and your current stock % 3) Respond to the opener by writing at least 2 sentences

Notebooks not yet graded, please pick up, drop off again at end of class. Also drop off any stock charts.

Work #20a, Title “Opener Shareout”

Pick 1 thing from your opener to share with your partner.

1) Each of you sign your name in your partner’s workbook under 1) to verified you’ve shared.

Agenda1) Federal Reserve

End Goal, you will be able to…1) How is money made?

Reminder1) Find & complete your 4 news pods

Review:1) Americans buy things not on how

much money they have, but how much they can borrow cheaply.

2) If there is more money “out there” then interest rates drop (cheap loans)

3) If there is less money “out there” then interest rates increase (pricier loans)

Review: How Bank Makes Profits1)

Loan Interest Rate: 6%

Bank:Profit Margin

Saving Interest Rate: 0.2%

Notes #20a, Title: “Federal Reserve”

1) Federal Reserve: Gov regulatory agency that controls US money supply (monetary policy). Fed Board serve 14 yrs to protect from politics. Led by Chairman Ben Bernanke.

Federal Reserve called “the Fed” or the “banker’s bank.”

Federal Reserve System1)

US Gov Needs Money, Issues US Bonds (iou)

Investors buy bonds

Federal Reserve can BUY bonds from investors (open market)

Investors get “new” money from Federal Reserve for the

investors' bonds

Moremoney intheeconomy

Federal Reserve System1)

US Gov Needs Money, Issues US Bonds (iou)

Investors buy bonds

Federal Reserve can SELL bonds from investors (open market)

Investors buys more bonds, gives money over to Federal

Reserve

Lessmoney intheeconomy

US Bureau of Engraving and Printing prints money for the Federal Reserve.

Federal Reserve Bank Letter/NumberBoston A New York B 2 Philadelphia C 3 Cleveland D 4 Richmond E 5 Atlanta F 6 Chicago G 7 St Louis H 8 Minneapolis I 9 Kansas City J 10 Dallas K 11 San Francisco L 12

Most of the Feds money these days is just electronically created.

Fed is indep. specifically so it won’t just print money, it uses more delicate tools

Fed Independence:a) 7 openings, 14 year terms, picked by

the President, confirmed by the Senate b) 1 of the 7 picked to be Chairman for 4 years by the Pres, confirmed by

Senate:Chairman Ben Bernankec) Politicians have pressure to create

short term boost in election years, Fed fights for stable growth

Alan Greenspan:

Appointed 1987

Former Chairman

Ben Bernanke:

Appointed 2006

Current Chairman

Notes #20a, Title: “Federal Reserve” 2) Economy Growing Too Fast (inflation):Too many ppl want to buy things, prices

go up (inflation). High prices get biz too excited, and too much is produced. Biz then face losses, leading to recession.

Notes #20a, Title: “Federal Reserve” 3) Slowing Economy (recession):People have less money OR fear bad

times ahead, no one wants to buy things, prices go down. Jobs lost as less is produced (unemployment).

Notes #20a, Title: “Federal Reserve” 4) Economy Growing Too Fast (inflation):Reduce money, make it more expensive to

borrow. Less money supply increases price of borrowing/higher interest rates (banks increase interest rates to attract more money to lend out)

5) Slowing Economy (recession):Increase money, make it easier to borrow.

More money available (banks can give lower interest rates, since extra money)

Work #20a, “Federal Reserve Debate”1) Read the 2 sides, choose 1 side, and write

which you choose and explain why.2) Then write down what your partner thinks

(include their name at the end).1 2 3 4 5

CON: Fed should help the economy during a recession (jobs)1) What’s the point of stable money value, if no one has a job?

2) The Fed can act more quickly and powerfully than Congress.

PRO: Fed should just focus on stable money (prevent inflation)1) Stable money is the backbone to any economy, the Fed should focus on this alone.2)Too attractive for gov to have Fed just print money

Notes #20b, Title: “Federal Reserve” 6) 3 Tools of the Federal Reserve: a) Sell US Bonds (bonds previously

bought) OR buy US Bonds (with “new” money).

b) Change banks Reserve Requirements: % of money banks must hold on to, can’t loan out ($ it keeps at the Fed).

c) Change the Discount Rate: Interest rate Fed charges banks for short term loans. 0.50% (disc rate always higher than Fed Fund Rate)

Federal Reserve Tools6)

Federal Reserve uses 3 tools to increase money supply

Banks less needy for money, lower savings rates

Banks lower loan rates, since saving rates are lower

People buy more since loans are more cheaper

Fightingrecession

Federal Reserve Tools6)

Federal Reserve uses 3 tools to reduce money supply

Banks more desperate for money, raise savings rates

Banks increase loan rates to cover higher saving rates

People buy less since loans are more expensive

Fightinginflation

Notes #20b, Title: “Federal Reserve” 7) Federal Funds Rate Target: Funds rate

is the interest rate banks loan to each other. All other interest rates follow this. Fed can’t force private interest rates, but they use the 3 tools to try to pressure banks to hit target. Currently: 0.25%

Notes #20a, Title: “Federal Reserve” 8) Federal Open Market Committee (FOMC):

Federal Reserve Committee of 12: 7 Fed Board members and 5 of the 12 district bank presidents work with Bernanke to make monetary decisions.

If the USA just printed money to speed things up, inflation could get out of control.

Work #20c, Title “Partner Questions”Read and then respond to these questions with a partner (include their name at the end):Changing the Daily Reserve RequirementFederal reserve sets daily percentage of money must be kept at the Fed, and rest can be lent out as loans. Banks will keep only what the Fed reserve says it has to(NO profits on reserve money, res req approx: 15%).

1) Lowering to 10% will fight inflation or unemployment?

Notes #20c, Title: “Lecture Notes” 8) Money Multiplier:

You put money in bank, bank hold Reserve, lend rest.

Borrower puts money in his/her bank, bank hold Resv, lend rest

Borrower puts money in his/her bank, bank hold Resv, lend rest

Borrower puts money in his/her bank, bank hold Resv, lend rest

M1 - Physical US dollarsM2 - Physical US dollars + Dollar amount held in average savings accountsM3 - Physical US dollar + Dollar amount held in large saving accounts + Dollars held overseas

Work #20d, Title “Partner Questions”Read and then respond to these questions with a partner (include their name at the end):Changing the Discount RateFederal reserve makes short term loans to banks currently: 0.50%. These loans are to cover any shortages in a banks reserve requirement with the Federal Reserve (Fed is lender of last resort).

1) If the Fed increase the Discount Rate to 9.50%, reduce inflation or unemployment?

Work #20e, Title “Partner Questions”Read and then respond to these questions with a partner (include their name at the end):Making Open Market Operations on BondsWhen the US Gov needs to borrow money, it issues US bonds,These bonds are sold to private investors, the Fedcan then buy US bonds from private investors. The Feddoes not buy directly from theUS gov, b/c its goal is to control money supply, nothelp the gov with its debt.

1) Fed buys US bonds reducesinflation or unemployment?

Work #20f, Title “Closer Shareout”

Pick the 1 most important thing you learned today to share with your partner.1) Write down a brief summary of what your partner said (include their name).2) Rate 1-10 (1: confused, 10: too easy) how well you well you mastered today’s lesson.3) Summarize Mr. Chiang’s feedback.

Homework: 1) Study today’s notes + work sections

for a possible workbook quiz.2) Pick and listen to your 4 news

podcast by next Monday.

Workbook Check: If your name is called, drop off your workbook with Mr. Chiang (if requested, points lost if your workbook is not turned in)