BBA2401UnitVIIAssignment

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Feb 20, 2024

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Interview Script Columbia Southern University Principles of Macroeconomics Dr. Craig Hovey August 24, 2021

Interview Script Interviewer: We are here with Mr. Joe Williams. He is an expert in financial matters. We will be discussing several topics. We will be discussing the structure of the Federal Reserve, the functions of money, the six qualities of ideal money, the tools of monetary policy used by the Federal Reserve to manipulate the money supply in the United States, the current status of monetary policy regarding a contractionary or expansionary stance in the United States, and the potential impacts on the transportation industry over the next 2 years of this monetary policy stance. Interviewer: Everybody has heard of the Federal Reserve, but what are its origin, purpose, and structure? Joe Williams: History shows us that during the early 19 th century, some prominent financial institutions failed. This caused many runs on banks by depositors wanting to withdraw their money. However, they could not because each bank only held a portion of the money they received in cash reserves. The result was panic. To address this panic, the Federal Reserve was founded in 1913 by Congress as the central bank and monetary authority of the United States to ensure that sufficient money and credit existed in the banking system to support a growing economy (McEachern, 2019). The structure of the Federal Reserve consists of the Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee and is officially called the Federal Reserve System. The Board of Governors, which is located in Washington, D.C., is the governing body of the Federal Reserve System. It is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate (Board of Governors of the Federal Reserve System, 2017). This Board provides general guidance for the Federal Reserve System and oversees the Federal Reserve Banks.

In establishing the Federal Reserve System, the United States was divided geographically into 12 Districts, each with a separately incorporated Reserve Bank. These twelve Reserve Banks act separately from each other but under the supervision of the Board of Governors. These twelve banks are the operating arms of the Federal Reserve System to gather data and other information about the businesses and the needs of local communities in its region (Board of Governors of the Federal Reserve System, 2017). The Federal Open Market Committee(FOMC) consists of 12 voting members which are the seven members of the Board of Governors, the Federal Reserve Bank of New York president, and 4 of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis (Board of Governors of the Federal Reserve System, 2017).The FMOC sets national monetary policy. The FOMC makes all decisions regarding the conduct of open market operations, which affect the federal funds rate, the size, and composition of the Federal Reserve’s asset holdings, and communications with the public about the likely future course of monetary policy (Board of Governors of the Federal Reserve System, 2017). In addition to these three key identities, there are depository institutions and advisory councils. Depository institutions offer checking accounts and any other accounts to the public to meet their financial needs. “Depository institutions are required to meet reserve requirements--that is, to keep a certain amount of cash on hand or in an account at a Reserve Bank based on the total balances in the checking accounts they hold” (Board of Governors of the Federal Reserve System, 2017, para. 15). There are a total of four advisory councils that assist and advise the Board on matters of public policy.

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Interviewer: Everyone has heard of the term money. Like any other industry, the transportation industry is dependent on money for its success. Please share with us the origins of money along with the function of money and the six qualities of ideal money. Joe Williams: The birth of money started when people such as farmers and hunters started to trade. Trade means an exchange of products for other products which is called barter. Barter depends on a double coincidence of wants which occurs when one trader is willing to trade his or her product for something another trader has to offer (McEachern, 2019). In a barter system, not only does this double coincidence of wants have to be determined but also the exchange rate. This exchange rate or transaction cost became very high. Therefore, this high transaction cost led to the birth of money. As you said, the transportation industry depends on money. This leads to the first function of money which is a medium of exchange. A medium of exchange is anything that is accepted as payment for goods or services. In the transportation industry, money is exchanged for cars, boats, and airplanes amongst other things. Money is used to pay for airplane, bus, and boat tickets. These are just some of the examples of how money is used as a medium of exchange. The second function of money is a unit of account. A unit of account is the standard on which prices are based and becomes a yardstick for the value of each product to be exchanged in the economy (McEachern, 2019). For example, a new car might cost you so many bushels of corn at today's prices, but you would find it most helpful if the price were set in terms of money because it is a common measure of value across the economy (Federal Reserve Bank of St. Louis, n.d.-b). The last function of money is a store of value. Money serves as a store of value when it retains purchasing power over time (McEachern, 2019). For example, a person could spend his or her money on a car or an airplane ticket, or he or she could hold onto it because it will be the same

value in the future. However, inflation slowly erodes the purchasing power of money over time (Federal Reserve Bank of St. Louis, n.d.-b). The ideal money is durable, portable, divisible, of uniform quality, has a low opportunity cost, and is relatively stable in value (McEachern, 2019). It must last several years and not perish quickly. It cannot be too bulky or it would not be easily carried and be hard to move from place to place. It must be divisible into smaller units. Bills or coins of the equal denomination are all alike, or nearly alike. One bill has no more or less value than any other. The fewer resources tied up in making money, the more they are available for other uses (McEachern, 2019). Money has to keep its value over time for people to be willing to accept and hold on to it. Interviewer: The Federal Reserve is in charge of manipulating the money supply in the United States in an attempt to create price stability and maximum employment. What tools of monetary poly does the Federal Reserve use to manipulate the money supply in the United States Joe Williams: The goals of the Federal Reserve have been expanded to include economic growth, stable interest rates, stable financial markets, and stable exchange rates. To effectively achieve all these goals, the Federal Reserve attempts to control inflation and promote economic growth. The Federal Reserve has four tools it can use to achieve these goals. One tool the Federal Reserve can use to help fight inflation or stimulate economic growth is open market operations. Open market operations consist of the Federal Reserve either buying or selling government securities. Buying government securities is considered to be expansionary monetary policy while selling government securities is considered to be contractionary monetary policy (Federal Reserve Bank of St. Louis, n.d.-a). The second tool the Federal Reserve can use to help fight inflation or stimulate economic growth is the discount rate. The interest that is charged to the member bank is called the discount rate

(Board of Governors of the Federal Reserve System, 2020). The Federal Reserve can make changes to the discount rate in an attempt to either stimulate economic growth or fight inflation. The third tool the Federal Reserve can use to help fight inflation or stimulate economic growth is reserve requirements. Reserve requirements represent the minimum amount of money member banks must hold in reserve to back up deposits (McEachern, 2019). The Federal Reserve can increase or decrease the discount rate depending on its fiscal policy. The last tool the Federal Reserve can use to help fight inflation or stimulate economic growth is the interest rate. Consumers have a choice when it comes to money in that they can save it, or they can spend it. A higher interest rate encourages consumers to save money and spend less whereas a lower interest rate discourages saving and encourages spending. Interviewer: Are we in a contractionary or expansionary stance in the United States and what is the current fiscal policy? Joe Williams: The United States is currently in a recessionary gap because the economy is not producing to its potential. Therefore, the current stance and fiscal policy in the United States is expansionary. A recessionary gap is closed through expansionary fiscal policy by increasing the amount the government spends, decreasing tax revenue, or employing some combination of the two (McEachern, 2019). Increasing government spending tends to encourage economic activity either directly through the purchase of additional goods and services from the private sector or indirectly by the transfer of funds to individuals who may then spend that money. Decreasing tax revenue tends to encourage economic activity indirectly by increasing individuals’ disposable income, which can lead to those individuals consuming more goods and services. Interviewer: What do you see as the potential impacts on the transportation industry over the next 2 years of this monetary policy stance.?

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Joe Williams: The present monetary policy stance will have a very positive effect on the transportation industry. COVID19 has caused a serious unemployment situation. Through this monetary policy stance, President Biden has introduced the American Jobs Plan. According to the Office of Management and Budget (2021), millions of American workers will be able to go back to work which will help the economy to be better than before the pandemic started. This plan will also help the transportation industry by appropriating money into the budget. The American Jobs Plan would put over $600 billion into the transportation industry to help rebuild its infrastructures related to roads, airports, new vehicle development, and others (Pramuk, 2021). The Federal Reserve is also helping out. The Federal Reserve would fund up to $600 billion in five-year loans through three programs which are the New Loans Facility, Expanded Loans Facility, and the Priority Loans Facility (Cheng et al., 2021). The Federal Reserve has also reduced the interest rate for lending to other banks. “The Federal Reserve has resumed purchasing massive amounts of securities, a key tool employed during the Great Recession when the Fed bought trillions of dollars in long-term securities” (Cheng et al., 2021, para. 4). These are just some of the examples of how the Federal Reserve has stepped in with a broad array of actions to limit the economic damage from the pandemic. Interviewer: We would like to thank Mr. Williams for taking time out of his schedule to participate in this interview. Hopefully, this interview has shed some light on the topics discussed. Thank you, everyone.

References Board of Governors of the Federal Reserve System. (2017). Structure of the Federal Reserve System . https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm Board of Governors of the Federal Reserve System. (2020). Policy tools: The discount rate . https://www.federalreserve.gov/monetarypolicy/discountrate.htm Cheng, J., Powell, T., Skidmore, D., & Wessel, D. (2021). What’s the Fed doing in response to the COVID-19 crisis? https://www.brookings.edu/research/fed-response-to-covid19/ Federal Reserve Bank of St. Louis. (n.d.-a). A closer look at open market operations. https://www.stlouisfed.org/in-plain-english/a-closer-look-at-open-market-operations Federal Reserve Bank of St. Louis. (n.d.-b) Functions of money - The economic lowdown podcast series . https://www.stlouisfed.org/education/economic-lowdown-podcast- series/episode-9-functions-of-money McEachern, W. A. (2019). Macro ECON6: Principles of macroeconomics (6th ed.). Cengage Learning. https://online.vitalsource.com/#/books/9781337671804 Office of Management and Budget. (2021). Budget of the U.S. government for the fiscal year 2022 . U.S. Government Publishing Office. https://www.govinfo.gov/content/pkg/BUDGET-2022-BUD/pdf/BUDGET-2022- BUD.pdf Pramuk, J. (2021). President Biden unveils his $2 trillion infrastructure plan and here are the details . https://www.cnbc.com/2021/03/31/biden-infrastructure-plan-includes-corporate- tax-hike-transportation-spending.html

BBA2401UnitVIIAssignment

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