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The Federal Reserve System We have seen how the private banking system creates money by making loans. However, private banks are not free to create money at will. Their ability to create money is controlled by the volume of reserves in the system , which is controlled by the Central Bank(Fed). The Fed therefore has the ultimate control over the money supply. We will now examine the structure and function of the Fed.   The United States is divided into 12 Federal Reserve districts, each with its own Federal Reserve bank. These districts are indicated on the map in Figure. The district banks are like branch offices of the Fed in that they carry out the rules, regulations, and functions of the central system.  Federal Open Market Committee (FOMC)  is a group composed of the seven members of the Fed’s Board of Governors, the president of the New York Federal Reserve Bank, and four of the other 11 district bank presidents on a rotating basis; it sets goals concerning the money supply and

The economy affects the federal government budget even if there are no explicit fiscal policy changes. There are effects that the government has no direct control over. They can be lumped under the general heading of “automatic stabilizers and destabilizers.” Automatic Stabilizers and Destabilizers Most of the tax revenues of the government result from applying a tax rate decided by the government to a base that reflects the underlying activity of the economy. The corporate profits tax, for example, comes from applying a rate (say 35 percent) to the profits earned by firms. Income taxes come from applying rates shown in tax tables to income earned by individuals. Tax revenues thus depend on the state of the economy even when the government does not change tax rates. When the economy goes into a recession, tax revenues will fall, even if rates remain constant, and when the economy picks up, so will tax revenues. As a result, deficits fall in expansions and rise in recessions, other thi

Almost all financial markets clear—that is, almost all reach an equilibrium where quantity demanded equals quantity supplied. In the money market, the point at which the quantity of money demanded equals the quantity of money supplied determines the equilibrium interest rate in the economy. This explanation sounds simple, but it requires elaboration. Supply and Demand in the Money Market The  Fed or Central Bank controls the money supply through its manipulation of the amount of reserves in the economy. Because we are assuming that the Fed’s money supply behavior does not depend on the interest rate, the money supply curve is a vertical line. In other words, we are assuming that the Fed uses its three tools (the required reserve ratio, the discount rate, and open market operations ) to achieve its fixed target for the money supply. Adjustments in the Money Market-  Equilibrium exists in the money market when the supply of money is equal to the demand for money and thus when the suppl

Interest Rates and Bond Prices  Interest Rates and Bond Prices Interest is the fee that borrowers pay to lenders for the use of their funds. . Firms and governments borrow funds by issuing bonds, and they pay interest to the lenders that purchase the bonds. Households also borrow, either directly from banks and finance companies or by taking out mortgages.  Some loans are very simple. You might borrow $1,000 from a bank to be paid back a year from the date you borrowed the funds. If the bank charged you, say, $100 for doing this, the interest rate on the loan would be 10 percent. You would receive $1,000 now and pay back $1,100 at the end of the year—the original $1,000 plus the interest of $100. In this simple case the interest rate is just the interest payment divided by the amount of the loan, namely 10 percent.  Bonds are more complicated loans. Bonds have several properties. First, they are issued with a face value, typically in denominations of $1,000. Second, they come with a m

Keynesian Economics  John Maynard Keynes’s General Theory of Employment, Interest, and Money, published in 1936, remains one of the most important works in economics. Keynes was the first to emphasize aggregate demand and links between the money market and the goods market. Keynes also emphasized the possible problem of sticky wages. In recent years, the term Keynesian has been used more narrowly. Keynes believed in an activist federal government. He believed that the government had a role to play in fighting inflation and unemployment, and he believed that monetary and fiscal policy should be used to manage the macroeconomy. This is why Keynesian is sometimes used to refer to economists who advocate active government intervention in the macroeconomy. Monetarism  The debate between monetarist and Keynesian economics is complicated because it means different things to different people. If we consider the main monetarist message to be that “money matters,” then almost all economists woul

WHOSO LIST TO HUNT BY SIR THOMAS WYATT Whoso list to hunt, I know where is an hind, But as for me,  hélas , I may no more. The vain travail hath wearied me so sore, I am of them that farthest cometh behind. Yet may I by no means my wearied mind Draw from the deer, but as she fleeth afore Fainting I follow. I leave off therefore, Sithens in a net I seek to hold the wind. Who list her hunt, I put him out of doubt, As well as I may spend his time in vain. And graven with diamonds in letters plain There is written, her fair neck round about: Noli me tangere , for Caesar's I am, And wild for to hold, though I seem tame. Must Read: Othello | William Shakespeare AMORETTI LXXV BY EDMUND SPENSER One day I wrote her name upon the strand, But came the waves and washed it away: Again I wrote it with a second hand, But came the tide, and made my pains his prey. "Vain man," said she, "that dost in vain assay, A mortal thing so to immortalize; For I myself shall like to this decay,

A BEAUTIFUL YOUNG NYMPH GOING TO BED BY JONATHAN SWIFT Corinna, pride of Drury-Lane For whom no shepherd sighs in vain; Never did Covent Garden boast So bright a battered, strolling toast; No drunken rake to pick her up, No cellar where on tick to sup; Returning at the midnight hour; Four stories climbing to her bow’r; Then, seated on a three-legged chair, Takes off her artificial hair: Now, picking out a crystal eye, She wipes it clean, and lays it by. Her eye-brows from a mouse’s hide, Stuck on with art on either side, Pulls off with care, and first displays ’em, Then in a play-book smoothly lays ’em. Now dexterously her plumpers draws, That serve to fill her hollow jaws. Untwists a wire; and from her gums A set of teeth completely comes. Pulls out the rags contrived to prop Her flabby dugs and down they drop. Proceeding on, the lovely goddess Unlaces next her steel-ribbed bodice; Which by the operator’s skill, Press down the lumps, the hollows fill, Up goes her hand, and off she sli