Kelly Munoz & Callie Gaskin

MONEY SUPPLY & FEDERAL RESERVE

• Fiat money (paper currency and coins, make up only a small part of America’s money supply. A much greater part involves a great demand deposits, such as checking accounts, and “near money.”

• Half of all transactions today do not involve currency at all

• Instead, they are completed through a transfer of funds initiated by the use of a check or a debit card

• But these can be easily converted to cash or transferred to a checking account

MONEY

• The amount of money in a nation’s money supply is crucial to the health of its economy

• If there is not enough money in circulation, the economy cannot grow

• On the other hand, too much money in circulation can also cause serious problems.

• . If we all have too much money, and loans are too easy to obtain, the money itself loses value and inflation results

• Federal Reserve policy is the most important determinant of the money supply

• The Federal Reserve affects the money supply by affecting its most important component, bank deposits

• The Federal Reserve requires depository institutions (commercial banks and other financial institutions) to hold as reserves a fraction of specified deposit liabilities

• Depository institutions hold these reserves as cash in their vaults or Automatic Teller Machines (ATMs) and as deposits at Federal Reserve banks

• Federal Reserve controls reserves by lending money to depository institutions and changing the Federal Reserve discount rate on these loans and by open-market operations

• The Federal Reserve uses open-market operations to either increase or decrease reserves

• The seller of the treasury security deposits the check in a bank, increasing the seller’s deposit

• The bank, in turn, deposits the Federal Reserve check at its district Federal Reserve bank, thus increasing its reserves

• If the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits

• As each bank lends and creates a deposit, it loses reserves to other banks, which use them to increase their loans and thus create new deposits, until all excess reserves are used up

• The Federal Reserve is an independent central bank

• It is independent since its decisions do not have to be ratified by the President or Congress

• The Federal Reserve System was created by Congress in 1913

• "to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."

"banks - Google Search." Google. N.p., n.d. Web. 9 May 2013. <http://www.google.com/search?q=banks&safe=active&client=firefox-

a&hs=Rwr&rls=org.mozilla:en-US:official&source=lnms&tbm=isch&sa=X&ei=mu6LUZP1LIbqiwKI5ICQAg&ved=

0CAoQ_AUoAQ&biw=1440&bih=754#safe=active&client=firefox-a&hs=CHX&rls=org.mozilla:en-US%3Aoffici>.

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q=first+federal+reserve&safe=active&client=firefox-a&hs=SLX&rls=org.mozilla:en-US:official&source=lnms&tbm=isch&sa=X&ei=pu-

LUeGUEcjSiwLanYDwCw&ved=0CAoQ_AUoAQ&biw=1440&bih=754>.

"first federal reserve - Google Search." Google. N.p., n.d. Web. 9 May 2013. <http://www.google.com/search?

q=first+federal+reserve&safe=active&client=firefox-a&hs=SLX&rls=org.mozilla:en-US:official&source=lnms&tbm=isch&sa=X&ei=pu-LUeGUEcjSiwLanYDwCw&ved=0CAoQ_AUoAQ&biw=1440&bih=754#safe=active&

client=firefox-a&hs=5LX&rls=org.mozill>.

WORKS CITED