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