the federal reserve. what is the federal reserve?? central bank of the us created in 1913 by an...

The Federal Reserve

What is the Federal Reserve??

central bank of the US

created in 1913 by an act of Congress & restructured after the Great Depression

created to provide a safer, more flexible and more stable monetary & financial system

How is the Fed structured? overseen by 7-member Board of

Governors12 districts – 1 Federal Reserve bank per

district

Member banks – all nationally chartered banks must join the Federal Reserve system

-- contribute funds & receive stocks & dividends from the system

-- Federal Reserve System is owned by banks, not government

What is the FOMC?

Federal Open Market Committee -- Board of Governors of the Fed Reserve & 5 district bank presidents -- make key decisions about interest rates

& the growth of the US money supply

check clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now

What is Monetary Policy?

the actions taken by the federal reserve to regulate the economy

3 monetary policy tools: 1. Discount Rate 2. Required Reserve ratio 3. Open Market Operations

1. Discount RateThe interest rate that banks pay to

borrow money from the Federal Reserve

Reducing the discount rate – encourages people to borrow money -> increases money supply & helps economy grow **used during recession**

- period of contraction

Increasing discount rate – discourages borrowing -> decreases money supply & slows economy down

*** used during periods of inflation*** -- period of expansion & rising

prices

2. Required Reserve Ratio

the fraction of deposits banks must keep on hand

reducing the RRR – frees up money for loans -> puts more $ in circulation

– helps economy grow increasing the RRR – keeps more $ out of circulation – slows economy down

3. Open Market Operations

the buying and selling of government bonds

with Federal Reserve Fundswhen the Fed buys bonds, more money

is put into circulation – helps the economy grow

when the Fed sells bonds, money is taken out of circulation – makes the economy slow down