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Classd Lectured Notesd Weekd 4d Monetaryd Economics
Professord Sharid Lyman,d Ph.D.
Thisd moduled introducesd andd discussesd monetaryd economics.d d Wed willd discussd thed differenced
betweend thed monetaryd policyd toolsd andd fiscald policyd tools.d d Wed willd continued tod discussd
macroeconomicd theory,d model,d andd issuesd relevantd tod manageriald decisiond making.d d Wed willd
discussd thed issuesd concerningd thed Keynesiand Multipliersd basedd ond thed workd ofd Johnd Maynardd
Keynes.d d Johnd Maynardd Keynesd isd consideredd byd manyd economistsd tod bed thed fatherd ofd
Macroeconomicsd justd asd Adamd Smithd isd consideredd byd manyd economistsd tod bed thed fatherd ofd
Economicsd andd Sird Alfredd Marshalld isd consideredd byd manyd economistsd tod bed thed fatherd ofd
Microeconomicsd andd marginald analysis.
Barter
Throughoutd humand history,d humansd haved maded exchangesd ofd goodsd ford goods,d servicesd ford
services,d andd goodsd ford services.d d Withoutd thed used ofd money,d exchangesd taked placed usingd barter.
Barterd isd thed exchanged ofd goodsd andd servicesd withoutd involvingd currencyd ord monetaryd units.d Ford
example,d ifd ad dairyd farmerd needsd ad paird ofd shoes,d hed willd god tod thed shoed cobblerd andd askd ifd hed cand
traded 5d poundsd ofd cheesed ford ad paird ofd shoes.d d Ifd thed cobblerd wantsd cheesed atd thed samed timed thed
dairyd farmerd wantsd shoes,d thend ad traded willd taked place.
Withd barter,d thed doubled coincidenced ofd wantsd createsd thed problemd ind whichd youd mustd findd ad persond
whod hasd whatd youd wantd andd wantsd whatd youd haved atd thed samed timed ford thed traded tod placed andd ford
eachd tradingd partnerd tod benefitd fromd thed trade.
Dued tod thed problemd ofd thed doubled coincidenced ofd wants,d moneyd camed intod beingd asd ad mored efficientd
methodd ofd exchange.
Money
Characteristicsd ofd Money
Thed fourd primaryd characteristicsd ofd moneyd are:d (1)d durability,d (2)d divisibility,d (3)d transportability,d andd
(4)d non-counterfeitability.
Functionsd ofd Money
Ind orderd tod bed consideredd money,d and objectd mustd meetd thed threed ofd thed followingd functionsd ofd
money:d
1.Mediumd ofd Exchange:d d Producers,d consumers,d andd governmentd mustd bed willingd tod acceptd thed
currencyd ind traded ford goodsd andd servicesd andd asd paymentd ofd debt.
2.Unitd ofd Account:d d Thed currencyd isd ad yardstickd byd whichd thed valued ofd alld otherd goodsd andd servicesd
ared measured.d Whend ad traded takesd place,d alld valuesd ared basedd ond thed currencyd acceptedd ind thed
market.d d Ind thed US,d thed acceptedd currencyd isd thed USd Federald Reserved note.d d Ind Japan,d thed
acceptedd currencyd isd thed Japanesed Yen.d d Ind mostd Europeand countries,d thed acceptedd currencyd isd thed
Euro.
3.Stored ofd Value:d d Thed currencyd isd capabled ofd maintainingd itsd valued overd timed ford futured
consumptiond andd investment.d Ford example,d ifd Id cand buyd ad bagd ofd groceriesd ford $50d thisd week,d thend
nextd week,d Id shouldd bed abled tod buyd thed samed bagd ofd groceriesd ford $50.d Ind 6d months,d ifd thed currencyd
isd actingd asd ad stored ofd value,d thend thed bagd ofd groceriesd willd bed $50.
Typesd ofd Money
Moneyd cand taked thed formd ofd (1)d commodityd moneyd ord (2)d fiatd money.
Commodityd moneyd andd fiatd moneyd bothd served thed functionsd ofd money.
Commodityd moneyd isd ad formd ofd moneyd thatd cand bed usedd ford thed exchanged ofd otherd goodsd andd
services,d asd welld asd served ad functiond asd ad goodd itself.
Thed textbookd refersd tod Cowried Shells:d http://www.theperfectcurrency.org/main-history-of-
money/history-of-money
Duringd WWII,d cigarettesd metd thed criteriad ofd thed 3d functionsd ofd moneyd whend otherd itemsd ind thed Redd
Crossd packagesd didd notd dued tod thed problemsd ofd short-termd deterioration,d perceivedd value,d andd
difficultyd relatingd valued ofd oned itemd tod others.
However,d commodityd moneyd isd ad currencyd thatd holdsd valued asd ad commodityd ord isd backedd byd ad
commodity.d d Examplesd ofd commodityd moneyd ared seashells,d beads,d giraffed tails,d cattle,d salt,d women,d
cigarettes,d goldd coins,d andd gold-backedd currency.d
Duringd Worldd Ward II,d USd militaryd personneld heldd ind Prisonerd ofd Ward campsd byd thed Axisd powers,d
developedd ad systemd ofd currencyd basedd ond thed productsd availabled tod themd ind theird Redd Crossd
packages.d d Eachd packaged hadd atd leastd oned packaged ofd cigarettes.d d Asd ad result,d ad singled cigarette,d
severald cigarettes,d ord ad packd ofd cigarettesd couldd buyd anyd otherd itemd suchd asd ad chocolated bar,d bard ofd
soap,d magazine,d etc.
Fiatd moneyd isd ad currencyd thatd holdsd valued basedd ond thed factd thatd thed governmentd issuingd thed
currencyd acceptsd thed currencyd asd paymentd ofd debt.d d Fiatd moneyd isd notd supportedd byd anyd preciousd
metald ord anyd otherd valuabled commodity.d Fiatd moneyd simplyd hasd valued basedd ond thed government’sd
willingnessd tod acceptd theird ownd currencyd asd paymentd ofd debt.
Internationald Currency
Ford ad currencyd tod bed consideredd and internationald currencyd itd mayd bed eitherd commodityd moneyd ord fiatd
money;d however,d itd mustd bed acceptedd acrossd bordersd ford imports,d exports,d andd domesticd
exchanges.
Historically,d thed Swissd Franc,d Britishd Pound,d Japanesed Yen,d Euro,d andd USd Dollard haved beend
consideredd internationald currencies.
However,d withd thed stabilityd issuesd andd Brexit,d thed Britishd Poundd isd losingd statusd asd and internationald
currency.
Ford example,d firmsd ind Japand ared requiredd thed Britishd firmsd tod signd contractsd withd eitherd Yen,d Euro,d
ord Dollars,d notd Poundsd asd thed exchanged currency.
Ind somed countries,d youd mightd bed abled tod directlyd payd ford itemsd withd and internationald currencyd
insteadd ofd thed domesticd currency.
Thed Demandd ford Moneyd isd basedd ond thed needd connectedd tod thed money.
1.Transactionsd demand:d d thed demandd ford moneyd ford shortd rund transactionsd suchd asd food,d gas,d
rent,d etc.d d Thisd moneyd isd usedd tod coverd expectedd expensesd ind thed shortd run.
2.Precautionaryd demand:d d thed demandd ford moneyd ind cased ofd emergencies.d d Thisd moneyd isd setd
aside,d tod coverd unexpectedd expensesd ind bothd thed shortd rund andd longd run.
3.d Assets/Speculatived demand:d d thed demandd ford moneyd ford longd rund investmentd andd return.
Thed Supplyd ofd Moneyd isd basedd ond liquidityd andd thed sourced ofd thed moneyd availabled andd thed wayd itd
isd measured.
Ind thed USd economy,d thed moneyd supplyd isd measuredd officiallyd asd M1d byd thed Federald Reserved andd
thed USd Government.d d However,d thered ared additionald categoriesd ofd moneyd supplyd includingd M1,d M2,d
andd L1.
Liquidityd isd howd fastd and itemd cand bed usedd asd currencyd ford exchange.
Ind thed USd economy,d currencyd andd coind ared 100%d liquid.d d Itd doesd notd taked timed ord anyd transactionsd
priord tod thed exchanged tod changed currencyd andd coind intod ad mediumd ofd exchange.
Thed Federald Reserved considersd M1d tod bed thed mostd liquidd itemsd ind thed USd economy.
M1d consistsd ofd currency,d coin,d demandd depositd accountsd (checkingd accounts),d andd traveler’sd
checks.
Thed Federald Reserved considersd M2d tod bed liquid,d butd mayd taked time,d incurd penalties,d ord otherd
exchangesd tod changed and itemd intod ad mediumd ofd exchange.
M2d =d M1d +d savingsd accountd (thered ared timed andd withdrawald limits)d +d certificatesd ofd depositd +d mutuald
fundsd +d moneyd marketd funds
Thed Federald Reserved considersd L1d tod bed lessd liquid,d butd tod stilld haved valued ind orderd tod becomed ad
mediumd ofd exchanged givend enoughd time,d transactions,d etc.
L1d =d M2d +d preciousd metalsd +d propertyd +d artd +d jewelryd +d collectiblesd +d antiquesd +d vehiclesd +d etc.
USd Centrald Bankd isd thed Federald Reserved Bank
Thed U.S.d Centrald Bankd ord Federald Reserved directsd 3d maind functions:d monetaryd policy,d ad bankd ford
banks,d andd ad bankd ford thed U.S.d government.d Monetaryd policyd isd ind placed tod promoted economicd
stabilityd ind termsd ofd prices,d employmentd andd economicd growth.d Tod reachd thesed goals,d thed Federald
Reserved has
thed powerd tod raised ord lowerd reserved levelsd thatd banksd ared requiredd tod have,d whichd directlyd affectsd
thed amountd ofd moneyd ind circulationd ind thed economy.d Byd doingd this,d itd keepsd controld ofd howd muchd
moneyd privated banksd haved availabled tod loand tod people.d Thed Federald Reserved isd ad bankd thatd banksd
used tod securelyd processd payments,d processd checksd andd supplyd cashd tod individuald banks.
Dued tod thed factd thatd thed Federald Reserved isd ad bankd ford thed U.S.d government,d itd isd abled tod created
moneyd tod putd intod thed economyd byd buyingd andd sellingd U.S.d governmentd securities,d liked bondsd andd
treasuryd bills.d Also,d whend wed payd taxesd ord received Sociald Securityd payments,d theyd ared processedd
throughd thed Centrald Bank.
Thed Federald Reserved Systemd wasd createdd ind 1913d followingd and erad markedd byd financiald panicsd andd
economicd depressions.d Itsd principald goald thend wasd economicd stability.d Thisd goald isd stilld importantd
today,d alongd withd currentd objectivesd suchd asd stabled prices,d highd employment,d andd economicd growth.d
Ind additiond tod workingd towardd thesed aimsd throughd itsd conductd ofd monetaryd policy,d thed Federald
Reserved (thed Fed)d isd ad bankd ford banks,d ad bankd ford thed U.S.d government,d andd ad supervisord andd
regulatord ofd banks.d
Thed supplyd ofd moneyd isd categorizedd intod 3d categoriesd byd thed Federald Reserved Bank.d d
M1,d M2,d andd L.
M1d includesd coins,d paperd currency,d moneyd depositedd intod demandd depositd accountsd (a.k.a.d DDAd ord
bankd accounts),d andd traveler’sd checks.d
M1d isd consideredd veryd liquidd ind thatd itd doesd notd involved timed ord costd tod exchanged M1d moneyd intod
moneyd ford exchanged ford consumption,d investment,d ord savings.
M2d consistsd ofd M1d andd savingsd deposits,d moneyd marketd funds,d andd certificatesd ofd deposit.d
M2d isd lessd liquidd ind thatd timed requirementsd existd thatd mayd incurd penaltiesd ford earlyd withdrawd fromd
thesed productsd makingd M2d lessd liquidd thand M1.
Ld consistsd ofd M2d plusd alld otherd productsd thatd mayd bed transferredd intod money.d d Ld isd thed leastd liquidd
category.d d Thisd categoryd includesd preciousd metals,d worksd ofd art,d collectibles,d antiques,d property,d etc.d
d Itd mayd taked severald transactionsd ord timed tod transferd thed itemd intod moneyd ford consumption,d
investment,d ord savings.
Monetaryd Policy
Thed Federald Reserved (thed Fed)d definesd monetaryd policyd asd itsd actionsd tod influenced thed availabilityd
andd costd ofd moneyd andd credit.d Becaused thed expectationsd ofd marketd participantsd playd and importantd
roled ind determiningd pricesd andd economicd growth,d monetaryd policyd cand alsod bed definedd tod included thed
directives,d policies,d statements,d andd actionsd ofd thed Fedd thatd influenced futured perceptions.d However,d
thed Fedsd cannotd controld thed inflationd directly;d instead,d indirectlyd byd affectingd thed moneyd supply,d itd isd
theorizedd thatd monetaryd policyd cand establishd rangesd ford inflation,d unemployment,d interestd rates,d andd
economicd growth.d Thed Fed’sd primaryd missiond isd tod ensured thatd enoughd moneyd andd creditd ared
availabled tod sustaind economicd growthd withoutd inflation.d Ifd thered isd and indicationd thatd inflationd isd
threateningd ourd purchasingd power,d thed Fedd mayd needd tod slowd thed growthd ofd thed moneyd supply.d Itd
doesd thisd byd usingd threed toolsthed discountd rate,d reserved requirementsd and,d mostd important,d opend
marketd operations.
Monetaryd Policyd Tools
Opend marketd operation:d Thisd isd thed toold thatd thed Federald Reserved usesd thed mostd frequentlyd (ond ad
dailyd basis)d monetaryd policyd toold tod involvesd thed buyingd andd sellingd ofd governmentd securitiesd ind
orderd tod influenced short-termd interestd ratesd andd thed growthd ofd thed moneyd andd creditd aggregates.d
Wheneverd and increased ind thed growthd rated ofd thed moneyd supplyd andd creditd isd needed,d ord ifd downwardd
pressured ond short-termd interestd ratesd isd desired,d thed Fedd sendsd securitiesd tod brokersd andd dealersd
electronicallyd andd takesd paymentd byd debitingd thed accountsd ofd banksd withd whichd thed brokersd andd
dealersd dod business.d Thesed reservesd leaved thed bankingd system,d therebyd reducingd thed moneyd
supplyd andd curtailingd thed expansiond ofd credit.
Tod stimulated thed economyd thatd isd experiencingd ad contraction,d thed Fedd willd increased thed moneyd
supplyd byd buyingd securities.
Tod slowd downd and overheatingd economyd thatd isd experiencingd and inflationaryd expansion,d thed Fedd willd
decreased thed moneyd supplyd byd sellingd securities.
Thisd isd doned ond ad dailyd basisd andd makesd incrementald changesd tod thed moneyd supply.d d Ind ad sense,d
opend marketd operationsd tweakd thed moneyd supply.
Reserved Requirements:d Ared thed requirementsd regardingd thed amountd ofd fundsd thatd thed bankd mustd
holdd ind reserved againstd depositsd maded byd theird customers.d Thisd moneyd mustd bed ind thed bank'sd vaultsd
ord atd thed closestd Federald Reserved Bank.d Thisd toold isd usedd tod maintaind thed minimumd amountd ofd
physicald fundsd ind theird reserve.
Reserved requirementd changesd ared notd maded veryd oftend atd all.d d Theyd ared ad policyd usedd ind and
extremed economicd situation.
Tod stimulated thed economyd thatd isd experiencingd ad contraction,d thed Fedd willd increased thed moneyd
supplyd byd decreasingd thed reserved requirementd allowingd banksd andd otherd financiald institutionsd tod loand
outd ad greaterd fractiond ofd thed deposits.
Tod slowd downd and overheatingd economyd thatd isd experiencingd and inflationaryd expansion,d thed Fedd willd
decreased thed moneyd supplyd byd increasingd thed reserved requirementd restrictingd evend mored thed
amountd ofd moneyd banksd andd otherd financiald institutionsd ared allowedd tod loand out.
Discountd Rate:d interestd rated chargedd commerciald banksd andd otherd depositoryd institutionsd ford loansd
thatd ared receivedd byd thed Federald Reserved Banks.d Thisd toold isd importantd becaused itd isd ad visibled
announcementd ofd changed ind thed Fed'sd monetaryd policyd andd itd willd gived insightd tod thed Fed'sd plans.
Liked thed reserved requirement,d thed discountd rated changesd ared notd maded veryd oftend atd all.d d Thisd policyd
isd notd usedd veryd often;d however,d thed Fedd isd increasingd thed discountd rated today.
Tod stimulated thed economyd thatd isd experiencingd ad contraction,d thed Fedd willd decreased thed discountd
rated whichd makesd borrowingd ford consumptiond andd investmentd friendlier.
Tod slowd downd and overheatingd economyd thatd isd experiencingd and inflationaryd expansion,d thed Fedd willd
increased thed discountd rated makingd savingsd mored attractived thand consumptiond andd investment.
Mostd importantd ofd thed Fed'sd responsibilitiesd isd monetaryd policy,d thed meansd byd whichd thed Fedd
influencesd thed growthd ofd moneyd andd creditd ind thed U.S.d economy.d d Whend thed supplyd ofd moneyd growsd
tood rapidlyd ind relationd tod thed economy'sd abilityd tod produced goodsd andd services,d inflationd mayd result.d
Itd isd ad cased ofd tood manyd dollarsd ind thed handsd ofd buyersd chasingd thed samed amountd ofd goods.d d Ond thed
otherd hand,d tood littled growthd ind thed moneyd supplyd cand leadd tod suchd problemsd asd recessiond andd
unemployment.d Asd thed moneyd flowd slowsd down,d peopled haved fewerd dollarsd tod spendd ford variousd
goodsd andd services.d Businesses,d ind turn,d received lessd moneyd ford thed goodsd andd servicesd theyd
produced andd haved lessd tod spendd ford thed resourcesd theyd use.
Throughd monetaryd policy,d thed Fedd triesd tod avoidd eitherd ofd thesed extremes.d Tod dod so,d thed Fedd
analyzesd thed nationald economyd andd seeksd tod influenced growthd ind moneyd andd creditd thatd willd
contributed tod stabled prices,d highd employment,d andd growthd ind thed economy.d d d Thed Fedd cand putd mored
moneyd ind thed economyd -d actuallyd created moneyd -d byd buyingd U.S.d governmentd securitiesd ond thed
opend market.d Thed Fedd paysd sellersd ford thed securities.d They,d ind turn,d depositd thed moneyd ind variousd
financiald institutions.d Whiled thesed institutionsd ared requiredd byd lawd tod keepd ad certaind percentaged ofd
thisd moneyd ond reserve,d theyd ared freed tod loand outd thed remainder.
Letd usd seed howd thisd works.d Supposed Janed Smithd isd holdingd ad U.S.d Treasuryd bond,d oned shed cand selld
atd anyd time.d Throughd ad broker,d shed sellsd thisd bondd tod thed Fedd ford $1,000.d Atd thisd pointd thed Fed,d
usingd powerd grantedd tod itd byd thed U.S.d Congress,d paysd Ms.d Smithd byd creatingd $1,000d thatd didd notd
existd before.d Ifd wed wered tod writed ad checkd ford $1,000,d thatd moneyd wouldd comed outd ofd ourd bankd
account.d Butd thed Fed'sd checkd createsd newd moneyd byd addingd tod bankingd reserves.d Ms.d Smithd
depositsd thed $1,000d ind Trustworthyd Bank.d Trustworthyd mustd keepd ad certaind amountd ond reserve.d d
We'lld supposed thed bank'sd reserved requirementd isd 10d percent.d Ofd thed $1,000d deposit,d then,d
Trustworthyd cand loand outd $900,d knownd asd itsd excessd reserves.d Joed Jones,d and insuranced salesman,d
needsd tod borrowd $900d ford newd computerd equipmentd ford hisd office.d Trustworthyd Bankd creditsd Jones'd
bankd accountd withd $900,d moneyd hed willd laterd repay.d Ind turn,d Jonesd writesd ad checkd tod Computerwised
Co.d ford $900.d Thisd company,d ind turn,d depositsd thed checkd ind Reliabled Savingsd andd Loan.d Reliabled
mustd holdd backd 10d percentd ond reserved andd cand loand outd $810.d Thisd processd goesd ond andd on,d
increasingd thed amountd ofd moneyd ind thed economy.d Whiled eachd financiald institutiond cand onlyd lendd and
amountd equald tod itsd excessd reserves,d thed financiald systemd asd ad wholed cand expandd thed amountd ofd
moneyd ind thed economy.
Asd youd cand see,d moneyd isd createdd ind ourd economyd ind twod waysd thatd ared differentd butd related.d Thed
Fedd beginsd thed processd byd creatingd "rawd money"d whend itd buysd ad Treasuryd securityd ond thed opend
market.d Thed bankingd systemd cand thend expandd thisd amountd ofd moneyd byd lendingd it.d d Ond thed otherd
hand,d ifd thed Fedd seesd thed nationd isd threatenedd withd inflation,d itd mayd somed ofd thed securitiesd ind itsd
portfolio.d Buyersd payd thed Fedd ford thesed securitiesd outd ofd theird bankd accounts.d Atd thisd point,d placesd
liked Trustworthyd Bankd andd Reliabled Savingsd andd Loand haved lessd moneyd tod lend.d Ind thisd way,d thed
Fedd removesd moneyd fromd thed economyd sinced thed moneyd paidd tod thed Fedd doesd notd god backd intod
anyd sortd ofd bankd account.
Ad secondd wayd ind whichd thed Fedd cand influenced thed economyd isd byd raisingd ord loweringd thed discountd
rate,d thed interestd rated chargedd financiald institutionsd whend theyd borrowd reservesd fromd thed Fed.d
Althoughd seldomd used,d discountd rated changesd cand bed powerfuld signalsd ofd thed directiond ofd monetaryd
policy.d
Thed Fedd cand alsod haved ad powerfuld impactd ond thed flowd ofd moneyd andd creditd byd eitherd raisingd ord
loweringd reserved requirements,d thed percentaged ofd theird depositsd thatd financiald institutionsd mustd keepd
ond reserve.d Ifd thed Fedd lowersd reserved requirements,d thisd cand leadd tod mored moneyd beingd injectedd
intod thed economyd sinced itd freesd upd fundsd thatd wered previouslyd setd aside.d Ond thed otherd hand,d ifd thed
Fedd raisesd reserved requirements,d itd reducesd thed amountd ofd moneyd thatd institutionsd ared freed tod loand
outd ord invest.d However,d thed Fedd isd cautiousd aboutd changingd reserved requirementsd andd hasd doned sod
onlyd occasionallyd becaused ofd thed dramaticd impactd itd cand haved ond bothd financiald institutionsd andd thed
economy.
Federald Reserved isd Ad Bankd ford Banks
Ad secondd responsibility,d thed Fedd isd ad bankd ford banks.d Ind today'sd societyd itd isd veryd importantd tod haved
ad secure,d effective,d andd efficientd meansd ofd makingd andd processingd payments.d d Suchd paymentsd
include,d ford example,d payrolld checks,d insuranced premiums,d andd larged paymentsd maded byd
companiesd whend theyd orderd newd equipment.
Oned ofd thed originald objectivesd ofd thed Fedd Actd wasd tod improved thed nation'sd checkd collectiond system,d
and importantd wayd ofd makingd paymentsd atd thatd time.d Today,d ind ourd mored sophisticatedd economy,d thatd
responsibilityd hasd beend expandedd tod included thed transferd ofd fundsd electronically.d
Thed Fedd alsod suppliesd cashd tod financiald institutionsd asd theyd needd it,d chargingd themd ford moneyd theyd
order.d Ond thed otherd hand,d thed Fedd creditsd financiald institutionsd ford cashd theyd sendd ind whend theyd
haved tood muchd ond hand,d haved wornd currencyd thatd needsd tod bed takend outd ofd circulation,d ord wantd tod
used itd tod meetd theird reserved requirement.
Federald Reserved isd Ad Bankd ford thed U.S.d Government
Ad thirdd responsibility,d thed Fedd isd ad bankd ford thed government.d Whend wed payd taxes,d ourd paymentsd
eventuallyd god intod and accountd atd ad Fedd bank.d Thesed accounts,d whichd ared muchd liked thed onesd wed
haved atd financiald institutions,d ared usedd byd variousd agenciesd tod maked paymentsd suchd asd militaryd
payrollsd andd Sociald Securityd benefits.
Finally,d thed Fedd helpsd thed Treasuryd byd sellingd andd redeemingd Treasuryd securities:d savingsd bondsd
asd welld asd Treasuryd bills,d notes,d andd bonds.
Federald Reserved Supervisiond andd Regulation
Thed Fedd isd alsod responsibled ford supervisingd andd regulatingd manyd financiald institutions.d d Otherd
regulatoryd agencies,d suchd asd thed Comptrollerd ofd thed Currencyd andd thed Federald Depositd Insuranced
Corporationd (FDIC),d ared responsibled ford overseeingd institutionsd notd regulatedd byd thed Fed.d d Itd isd alld
doned tod maked sured financiald institutionsd ared safe,d sound,d competitived placesd ind whichd tod depositd
money.d Itd alsod worksd tod ensured thatd people,d asd consumersd ofd credit,d ared treatedd fairly.
Asd itd carriesd outd itsd responsibilities,d thed Fedd isd independentd withind thed governmentd andd generallyd
insulatedd fromd day-to-dayd politicald pressures.d Ond thed oned hand,d thed Fedd wasd createdd byd andd
reportsd tod Congress;d itsd highestd officials,d thed membersd ofd thed Boardd ofd Governors,d ared appointedd byd
thed Presidentd andd confirmedd byd thed Senate.d Mostd ofd thed Fed'sd earningsd ared returnedd tod thed U.S.d
Treasury.d Butd thed Fedd is,d indeed,d broadlyd involvedd ind thed nation'sd politicald processesd becaused thed
Fed'sd basicd purposed isd tod helpd thed nationd meetd itsd long-rund economicd goals,d andd itd mustd bed
responsived tod thed nation'sd needsd asd expressedd byd thed public.d However,d thed Fedd wasd designedd tod
bed insulatedd fromd short-rund politicald andd economicd pressures.d d Ford example,d ifd thed Fedd wered
subjectd tod politicald influences,d politicald office-holdersd mightd tryd tod fulfilld campaignd promisesd throughd
monetaryd policyd thatd isd notd ind thed bestd interestsd ofd thed nationd overd thed longd run.d Thisd insulationd hasd
severald elements:d (1)d thed Fedd operatesd ond itsd ownd earningsd ratherd thand moneyd appropriatedd byd
Congress;d thesed earningsd comed fromd interestd earnedd ond thed Fed'sd portfoliod ofd securitiesd andd moneyd
receivedd ind paymentd ford servicesd providedd tod financiald institutionsd suchd asd checkd clearing;d (2)d thed
termsd ofd thed membersd ofd thed Boardd ofd Governorsd ared longd (14d years)d andd staggeredd sod nod oned
Presidentd cand pickd thed entired board;d andd (3)d thed Fedd isd separated fromd thed U.S.d Treasury.d
Federald Reserved Facts
Betweend 1863d andd 1914,d thed Unitedd Statesd sawd ad seriesd ofd bankingd panicsd -d ind 1873,d 1884,d 1890,d
1893,d andd 1907.d Itd wasd thed lastd panicd -d occurringd ind ad timed ofd generald prosperityd -d thatd ledd tod thed
creationd ofd thed Fed.d d d Presidentd Woodrowd Wilsond signedd thed Federald Reserved Actd shortlyd afterd 6d
p.m.d ond Decemberd 23,d 1913.d Hed andd hisd wifed leftd immediatelyd afterwardd ford ad Gulfd Coastd vacation,d
havingd hadd theird bagsd packedd sinced mid-Decemberd ind anticipationd ofd finald actiond ond thed bill.d d Whend
thed 12d Federald Reserved Banksd openedd ond Novemberd 16,d 1914,d noned hadd permanentd quarters.d Ind
mostd ofd thed Banksd ad clerkd ord twod oversawd thed smalld trickled ofd business.d d Twiced ad yeard thed Boardd ofd
Governorsd ofd thed Federald Reserved Systemd submitsd ad writtend reportd tod Congressd ond thed stated ofd thed
economyd andd thed coursed ofd monetaryd policy,d andd thed Fedd Chairmand oftend isd calledd tod consultd withd
Congressd ond thisd report.
Onlyd oned memberd ofd thed Boardd ofd Governorsd cand bed selectedd fromd anyd oned ofd thed 12d Federald
Reserved Districts.d Asd ad result,d thed governorsd representd variousd regionsd ofd thed country.d d Aland
Greenspand becamed Chairmand ofd thed Federald Reserved Boardd ofd Governorsd ind 1987.d Hed wasd
originallyd appointedd byd Presidentd Reagand andd representsd thed Newd Yorkd Fedd District.d Mr.d
Greenspand wasd appointedd tod hisd fourthd consecutived four-yeard termd ind 2000.
Befored thed Fed,d checkd clearingd wasd and antiquated,d costlyd process.d Oned checkd drawnd ond ad bankd ind
Sagd Harbor,d Longd Island,d andd depositedd ind Hoboken,d N.J.,d 93d milesd away,d traveledd ford 10d days,d
coveredd 1,223d miles,d andd passedd throughd 10d banksd befored itd cleared.d d d Althoughd banksd ared
operatedd ford profitd andd bankersd ared freed tod maked manyd decisionsd ind theird dailyd operations,d bankingd
hasd commonlyd beend treatedd asd ad matterd ofd publicd interest.d Thus,d bankingd lawsd andd regulationsd
haved beend extendedd tod manyd aspectsd ofd banking.d d Thed Fedd oftend findsd itselfd walkingd ad tightd roped
betweend differentd setsd ofd sociald costsd andd priorities.d Tod dod itsd jobd successfully,d thed Fedd mustd
remaind focusedd ond long-rund nationald interestsd andd avoidd beingd thrownd offd balanced byd short-rund
politicald concerns.
Thered ared 12d Federald Reserved Banksd whosed headd officesd ared locatedd ind Boston,d Newd York,d
Philadelphia,d Cleveland,d Richmond,d Atlanta,d Chicago,d St.d Louis,d Minneapolis,d Kansasd City,d Dallas,d
andd Sand Francisco.d Togetherd withd thed Boardd ofd Governorsd ind Washingtond D.C.,d theyd formd thed
nation'sd centrald bank.d
Retrievedd fromd wysiwyg://99/http://www.kc.frb.org/infofrs/ifrsmain.htmd ond Septemberd 21,d 2002.
Lagd timesd ford Fiscald Policyd andd Monetaryd Policy
Economistsd mustd considerd thed conceptd ofd lagd timesd withd respectd tod economicd behaviord andd policyd
responsesd whend developingd andd implementingd economicd policy.
Threed Lagd Timesd ford Fiscald Policyd andd Monetaryd Policy
Recognitiond Lagd d thed lagd timed betweend ad changed ond thed businessd cycled andd thed timed itd takesd ford
analystsd tod seed thed changed ind thed data.
Implementationd Lagd d thed lagd timed betweend seeingd ad changed ond thed businessd cycled andd thed timed
itd takesd ford fiscald policymakersd and/ord monetaryd policymakersd tod determined ad resolutiond andd tod
implementd thed resolution.d Ind thed US,d fiscald policyd hasd ad greaterd implementationd lagd timed thand
monetaryd policyd does.
Responsed Lagd d thed lagd timed betweend thed policyd implementationd andd thed responsed byd consumersd
andd firmsd tod changed behavior.
Asd ad result,d ad downturnd beginningd ind oned administrationd ord boardd ofd governors’d watchd mayd notd bed
fullyd realizedd ord resolvedd untild thed newd policymakersd taked office.
Fiscald v.d Monetaryd Policyd Lagd times
Fiscald Policyd ind thed USd economyd involvesd thed gatheringd ofd data,d discussiond ofd bothd Houses,d deals,d
andd voted ind thed legislatived branchd whichd isd bothd thed Housed ofd Congressd andd thed Housed ofd Senate.
Monetaryd Policyd ind thed USd economyd involvesd thed gatheringd ofd data,d discussiond ofd thed Federald
Reserved Boardd ofd Governors,d andd determinationd ofd thed policyd byd thed Chaird ofd thed Federald Reserve.
Ond thed businessd cycle,d thed lagd timesd ared notd thed samed ford Fiscald Policyd andd thed Monetaryd Policy.
Fiscald policyd hasd muchd longerd recognitiond lagd timesd becaused thed legislatived branchd hasd manyd
differentd sourcesd gatheringd datad ond quarterlyd andd annuald basis:d d Bureaud ofd Labord Statisticsd (BLS),d
Bureaud ofd Economicd Researchd (BER),d Bureaud ofd Economicd Analysis,d Federald Reserve,d diversed
lobbyistsd sources,d diversed privated andd publicd institutionsd ofd higherd education,d andd internald research.
Monetaryd policyd hasd muchd shorterd recognitiond lagd timesd becaused thed Federald Reserved gathersd datad
dailyd withd opend marketd operations,d asd welld asd weekly,d monthly,d quarterly,d semi-annually,d andd
annually.
Fiscald policyd hasd ad veryd longd implementationd lagd timed becaused ofd thed processd involvingd bothd
Housesd ofd thed Legislatived Branch,d thed dealsd thatd taked place,d andd thed discussiond andd voted
intricacies.
Monetaryd policyd hasd ad veryd shortd implementationd lagd timed becaused onced thed Federald Reserved Chaird
hasd determinedd thed necessaryd policyd (whetherd democraticallyd withd significantd inputd ord autocraticallyd
withoutd anyd input),d thed policyd cand bed implementedd immediately.
Fiscald policyd hasd and unpredictabled responsed lagd timed becaused householdsd andd firmsd needd tod knowd
aboutd thed policyd change,d thend theyd mustd acceptd thatd thisd changed isd ad longd rund change,d notd ad shortd
rund temporaryd change,d andd thatd thed changed isd beneficiald ford themd personally.
Monetaryd policyd hasd ad relativelyd shortd responsed lagd timed becaused changesd ind interestd ratesd andd thed
moneyd supplyd cand bed observedd andd includedd ind decisiond makingd dailyd byd householdsd andd firms.
However,d bothd fiscald policyd andd monetaryd policyd mustd bed implementedd andd respondedd tod ond thed
rightd phased ofd thed businessd cycled ord riskd exacerbatingd thed inflationd ord recession.
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