[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Board of Governors
7 members appointed
by the president and
confirmed by the
Senate
Appoint 3
directors
12 Federal Reserve
banks
The 9 directors appoint
the president of the
Federal Reserve banks
Elect 6
directors
Member
commercial
banks
Federal Open Market
Committee
Board of Governors
plus 5 Federal Reserve
bank presidents
of the Federal Reserve System is depicted in Figure 28.7. The Federal
Open Market Committee, or FOMC, is responsible for making monetary
policy. The name of the FOMC comes from the way the committee operates.
The Fed engages in open market operations—so called because (as
discussed in more detail below) they involve the Fed’s entering the capital
market directly, much as a private individual or firm would, to buy or sell
government bonds. Once the FOMC has set its policy targets, its operations
are carried out by the Federal Reserve Bank of New York because
that bank is closest to the huge capital markets in New York City.
The FOMC has twelve voting members. These include the governors
appointed by the president and some of the regional bank presidents,
who are appointed, in part, by private member banks. The seven governors
of the Federal Reserve are all voting members of the FOMC, as is the
president of the Federal Reserve Bank of New York. The remaining four
votes rotate among the other eleven presidents of the regional Federal
Reserve banks.
Figure 28.7
THE STRUCTURE OF THE FEDERAL
RESERVE
The Federal Reserve operates at both a national level
and a district level. The president appoints the Board
of Governors; the district level includes some directors
appointed nationally and some from within the
district; and the Federal Open Market Committee
includes the governors, appointed by the president,
and representatives from the district banks.
HOW THE FED AFFECTS THE
MONEY SUPPLY
Earlier, we said that the money supply depends on the level of bank reserves
in the economy. Thus, by controlling the level of reserves, the Fed can affect
the money supply. It uses three different policy tools: open market operations,
the discount rate, and reserve requirements. Because open market
operations are by far the most important of these tools, we will begin by
describing what they are and how they affect the level of bank reserves.
Open Market Operations The Fed alters the stock of bank reserves through
the use of open market operations during which it buys or sells financial assets,
normally government securities. Imagine that the Fed buys $1 million of
government bonds from a government bond dealer. The dealer deposits the Fed’s
$1 million check in its bank, AmericaBank, which credits the dealer’s account for $1
million. (These transactions are in fact all electronic.) AmericaBank presents the
check to the Fed, which credits the bank’s reserve account with $1 million.
AmericaBank now has the bond dealer’s $1 million of new deposits on its books,
matched by $1 million in new reserves; accordingly, it can lend out an additional
$900,000, holding the remaining $100,000 to meet its 10 percent reserve requirement.
As we saw earlier, the money multiplier then goes to work, and the total expansion
of the money supply will be equal to a multiple of the initial $1 million in deposits.
And credit—the amount of outstanding loans—will also increase by a multiple of
the initial increase in deposits.
The purchase of the same bonds by a private citizen, Jane White, has quite a
different effect. In this case, the dealer’s deposit account goes up by $1 million but Jane’s
account goes down by $1 million. As a consequence, the dealer’s bank gains $1 million
in funds but Jane’s bank loses $1 million in funds. The total funds available in
628 ∂ CHAPTER 28 MONEY, THE PRICE LEVEL, AND THE FEDERAL RESERVE