Chapter 4
Functions of the Fed
Outline
Organization of the Fed
Federal Reserve District Banks
Member Banks
Board of Governors
Federal Open Market Committee (FOMC)
Advisory Committees
Integration of Federal Reserve Components
How the Fed Controls Money Supply
Open Market Operations
Role of the Fed’s Trading Desk
How Fed Operations Affect All Interest Rates
Adjusting the Reserve Requirement Ratio
Adjusting the Fed’s Loan Rate
The Fed’s Intervention During the Credit Crisis
Fed Loans to Facilitate Rescue of Bear Stearns
Fed Purchases of Mortgage-Backed Securities
Fed’s Purchase of Commercial Paper
Fed’s Purchase of Long-Term Treasury Securities
Perception of Fed Intervention During the Crisis
Global Monetary Policy
A Single Eurozone Monetary Policy
Global Central Bank Coordination
Key Concepts
1. Describe the role and the organization of the Fed.
2. Explain how monetary policy tools are used by the Fed to control economic conditions.
3. Explain why the Fed’s monetary policy can not ignore international conditions.
POINT/COUNTER-POINT:
Should There Be One Global Central Bank?
POINT: Yes. One global central bank could serve all countries in the manner that the European Central
Bank now serves several European countries. If there was a single central bank, there could be a single
monetary policy across all countries.
COUNTER-POINT: No. A global central bank could create a global monetary policy only if there was a
single currency used throughout the world. Moreover, all countries would not agree on the monetary
policy that is appropriate.
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: While there may be some benefits if the monetary policy was consistent among countries, it
would be impossible to get agreement among all countries about the policy to be used. Countries would
not want to give up their power to control their own money supply.