Download - the fed
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WHAT IS IT AND WHAT ARE ITS FUNCTIONS?
The Federal Reserve System
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The Fed
● Created in 1913 by Congress, “The Fed” is a central bank○ Jobs include determining the money supply and supervising
banks○ Principal components are the Board of Governors and the 12
Federal Reserve district banks
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Board of Governors
● Controls and coordinates the Fed’s activities● Made up of seven members, each appointed to a 14
year term by the President with the Senate’s approval● President also chooses one member as chairperson
of the board for a four year term
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District Banks
● US is broken into 12 Federal Reserve districts, each of which has a Federal Reserve district bank○ Ours is located in Boston
● Each of the 12 Federal Reserve district banks has a President
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FOMC
● The Federal Open Market Committee is the major policy-making group within the Fed
● Made up of 12 members○ Seven from the Board of Governors, five from Federal district
banks
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What does the Fed do?
● Control the money supply● Supply the economy with paper money
○ Printed in DC and issued to the 12 district banks, which then use the money to meet the demands of the banks and the public
● Hold bank reserves○ All commercial banks are required to keep a reserve account
with their district bank
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What does the Fed do? Cont.
● Provide check- clearing services○ When you write a check, the Fed controls the process by which
the funds change hands○ When John (Boston) writes a check to Joe (New York), he
records the amount in his checkbook- if he writes a check for $500, he deletes that amount from his balance
○ When Joe gets the check, he endorses it and cashes it at his bank. The balance in his account goes up by $500
○ Joe’s NY district bank increases the reserve account of his bank by $500 and decreases the reserve account of John’s bank by $500
○ The NY district bank sends the check back to John’s bank, which reduces his account by $500
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What does the Fed do? Cont.
● Supervise member banks○ The Fed examines the books of member banks to ensure they
have followed safe loaning practices and followed all regulations
● Serve as the lender of last resort○ The fed can help ailing banks that may be in financial straits
when no one else is willing to help them
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Fed Tools for Changing the Money Supply
● The Fed has three tools that it can use to raise or lower the money supply○ the reserve requirement○ open market operations○ the discount rate
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Changing the Reserve Requirement
● The Fed can increase or decrease the money supply by changing the reserve requirement.○ Lower reserve requirement = Increase in money supply.○ Higher reserve requirement = Decrease in money supply.
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Open Market Operations
● The Federal Open Market Committee (FOMC) conducts open market operations by buying and selling government securities.
● When the FOMC makes an open market purchase, it increases the money supply. When an open market sale is made, the money supply falls.
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Changing the Discount Rate
● The federal funds rate is the interest rate one bank charges another for a loan.
● The discount rate is the interest rate the Fed charges a bank for a loan.
● When the discount rate is decreased, the money supply rises. When the discount rate is increased, the money supply falls.