Module 24-26

Time Value of Money

\( FV = PV\times(1+i)^n\)

\(PV = \frac{FV}{(1+i)^n}\)

Where:

• FV = Future Value
• PV = Present Value
  
• i = interest/discount rate
• n = number of periods (based on the time units of the interest rate).
  

Structure of Fed

Chair - Appointed by the President. Serve 4-year terms.

Board of Governors - 7 members; also appointed by the President. Serve 14-year terms.

• Conduct monetary policy based on economic conditions.

District Banks - 12 members; numbered 1-12 from east to west coast. 

• Provides liquidity for regional banks.
• Has Presidents

Commercial Banks  - Owners of the Fed (own stock in the Fed).

Federal Open Market Comity

5 Presidents of the 12 district banks + the 7 members of the Board of Governors.

• Meet at the NY Fed; 4 times a year
• Should we raise, lower, or keep interest rates the same?

Test Question:

What did the Fed do during the Great Depression?

• Does not Handel the stock market, therefore "not their fault."
  • But did intervene with the FDIC
    • Shut down banks to prevent bank runs.

Insured up to $250,000.

Fed Actions

• Would increase the money supply if there is a recessionary trend.
  • Helps increase aggregate demand.
    

Tools of Monetary Policy

1. Reserve Requirement
   1. Percentage of a deposit banks must keep.
2. Discount Rate - Second most commonly used
   1. The interest rate the Fed charges banks to borrow from the Fed.
3. Open Market Operations - Most commonly used
   1. The buying and selling of government securities to and from commercial banks
      
   2. All comes down to excess reserves.
      • You add excess reserves 
        1. Buying bonds = increase excess reserves

Monetary is the preferred method!

• Because they are felt very quickly.