Chapter 16Monetary Policy and a Look at the Role of Labor

The Federal Reserve System

0The central bank is a nation’s main monetary authority. Monetary means related to money.

0The Federal Reserve System is the central bank of the U.S.0#1 The central bank holds reserves. These reserves

influence the market and are used in an emergency.0#2 The central bank assure stability. It regulates and

supervises all banking.0#3 The central bank lends money. It serves private

banks and the government.

The Fed: U.S National Bank0The “Fed” or Federal Reserve became the first truly national

and central bank of the U.S. in 1913. In essence it is the bank of the banks.

0The Fed also distributes currency and regulates the supply of money.

Structure of the Fed0#1 The Board of Governors: Seven appointed members who

serve no more than two years and performs operations and sets policy.

0#2 Twelve District Banks: Regional branches of the Fed that focus on the policies and concerns of a particular region of the country.

0#3 Member Banks: All nationally chartered banks0#4 Federal Open Market Committee (FOMC): Supervises

sales and purchases of government.0#5 Advisory Councils: Committees that directly report to the

board of governors.

Functions of the Federal Reserve

Serving the Banking System0#1: Check Clearing: The service where the Fed records the

receipts and expenditures of bank clients.0#2 Lending Money: The Fed lends money out to private and

local banks on a short term basis.0#3 Regulating and Supervising Banks: Enforces lending laws

and ensures that banks are following the proper protocol

Serving the Government0#1 Paying Government Bills: The Fed acts as the money

handler for taxes and is the one that makes the mandatory payments for the government.

0#2 Selling Government Securities: Sells and manages bonds sold to other governments and private owners when the government wants to borrow money.

0#3 Distributing Money: Issues the actual currency used in day to day business.

Creating Money0The Fed does not literally create money, that is the Mint.

Instead it directs the way in which it is distributed: loans, directly, indirectly, etc.

0To ensure banks don’t over loan, the fed has a Required reserve ratio (RRR) which is the fraction of a bank’s deposits that must be kept in reserve and on hand.

0The deposit multiplier formula tells how much the money supply will increase after an initial cash deposit.

0Pg. 484-85 for examples.

Demand for Money0The Fed has to pay attention to several factors of

demand when determining how to set the supply of money.0#1 Cash on Hand: Certain times require people to

have more physical cash on hand.0#2 Interest Rates: The higher the rates, the more

likely people will save.0#3 Cost of Consumer Goods and Services0#4 Level of Income: The higher the income, them

more people tend to hang onto in cash.

Monetary Policy

The Fed’s Tools0Monetary Policy are the actions taken by the Fed to change

money supply and influence the economy.0 Action #1: Open Market Operations: The sale or purchase of

government securities.0 Action #2: Adjusting the Reserve Requirement0 Action #3: Adjusting the Discount Rate (The interest rate that the

Fed charges when it lends money to other banks).

Types of Monetary Policy0#1 Expansionary: The plan involves increasing the money

supply. This is a policy used to bring an economy out of a recession. Buys bonds and lowers the reserve requirement and discount rate.

0#2 Contractionary: The plan involves reducing the money supply. Designed to reduce inflation and it make it easier for businesses to get loans. Sells bonds and increases the reserve requirement and discount rate.

Labor Forces

Why different pay?0No matter the fiscal and monetary policy of the country

people most immediately see money in the form of what they are paid. So why do wages differ?0 #1 Human Capital: The knowledge and skills that enable workers

to be productive.0 #2 Working Conditions0 #3 Discrimination0 #4 Government Actions (ex. The minimum wage)

Trends in Today’s Labor Market0Over the past couple generations the U.S. Civilian Labor Force

who are those American 16 and older and who can work has been influenced by radical changes in society.0#1 The Labor Force now has an increased amount of women

because of equality laws. (+)0#2 The Labor Force has become more educated and is able to

handle more complex jobs. (+)0#3 Technology has radically altered the type of jobs needed

to be done. (+/-)0#4 Globalization has impacted the Labor force primarily in

the form of outsourcing and insourcing. (+/-)

Organized Labor0A Labor Union is an organization of workers that seeks to

improve wages, working conditions, fringe benefits, job security, and other work related matters for its members.

0The Strike is the main tool of labor unions and is when labor members stop working to convince an employer to meet union demands.

History of Unions01800s: Unions really take off in the U.S. as industries begin to

emerge in larger numbers.0By 1900: Unions become more organized and influential and

begin to have real political influence.01930s: Unions lose membership but actually gain power,

thanks to New Deal legislation. Very Political.01940s and 1950s: The fear of communism creates a backlash

towards organized labor.0Today: Labors still are a force but vary radically based on the

state they operate in.

Labor Unions Today0A closed shop is a business where an employer can hire only

union members.0A union shop is a business where workers are required to

join a union within a set time period after being hired.0Some states have right to work laws where it makes it illegal

to require workers to join unions (Texas is one).0Labors to this day continue to use collective bargaining

where they negotiate wages and working conditions on behalf of the enitre union membership.

Unemployment0Unemployment can be broken down into voluntary

unemployment and involuntary unemployment.0Frictional unemployment is unemployment that occurs because

it takes workers some time to move from one job to another.Cyclical unemployment occurs during recessions because, when demand for goods and services in an economy falls, some companies respond by cutting production and laying off workers rather than by reducing wages and prices.

0Structural unemployment occurs because some labor markets have more workers than there are jobs available, and for some reason wages don't decrease to bring the markets into equilibrium.