Section 1: Organization of the Federal Reserve System Government Bank Established in 1913 Impacts how you spend, invest, and

borrow money Is in charge of the nation’s monetary

policy Determines how much money is

available, how easily it can be borrowed, and how costly it will be

Organization of the Federal Reserve System The Federal Reserve System is made

up of a Board of Governors assisted by the Federal Advisory Council, the Federal Open Market Committee, 12 Federal Reserve District Banks, 25 branch banks, and about 4000 member banks.

Monetary Policy

Involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit

Board of Governors

Directs operations of the Fed Supervises the 12 Federal Reserve

District Banks Regulates member banks 7 full-time members are appointed

by President, approved by Senate, serve for 14 years. Members cannot be reappointed no political pressure

Federal Advisory Council

Assist the Board of Governors 12 members elected by the directors

of each Federal Reserve District Bank

Meet 4x a year Report on general business

conditions of the nation

Federal Open Market Committee 12 voting members Meet 8x a year Determines whether or not to adjust

interest rates

Federal Reserve Banks

12 Federal Reserve Districts- each has a bank

Set up as a corporation owned by member banks

9 person board of directors supervises each

Also includes 25 Federal Reserve branch banks

Member Banks

All national banks (chartered by federal Government) are required to become members of the Federal Reserve System

Banks chartered by states may join if they choose to

Member banks must buy stock in it’s district’s Federal Reserve Bank, but they also get to vote for 6 of the 9 directors

Functions of the Federal Reserve Clearing Checks Acting as the Federal Government’s

fiscal agent Supervising member banks Holding reserves and settling reserve

requirements Supplying paper currency Regulating the money supply Consumer Protection

Section 2: Money Supply and the Economy Loose v Tight Money Policies

Loose Money Policy Tight Money Policy

Loose Money Policy

Tight Money Policy

Fractional Reserve Banking System in which only a fraction of the

deposits in a bank is kept on hand, or in reserve; the remainder is available to lend

This is why you suffer a penalty if you withdraw all of your money at once without notice

Your money (deposits) is lent out by the bank the bank earns interest on the loan you receive some of that interest

Money Expansion

Banks use excess reserves to create new money

Regulating the Money Supply Three Ways:

Changing the Reserve Requirements Changing the Discount Rate Open-Market Operations

Changing the Reserve Requirements Increasing or decreasing the money

supply will affect how much “new” money can be made, as we saw in the table

Changing the Discount Rate The Fed can raise or lower the discount rate,

interest rate that the Fed charges on loans to member banks, making it more or less appealing to member banks to request loans

Member banks may need loans if they have dropped below the reserve requirement because a customer suddenly withdrew all their money

If member banks expect a “run” on the banks, they won’t lend out as much so that they will have enough there to give to customers and they won’t need a loan from the Fed.

Prime Rate- amount of interest banks charge on loans to their best customers

Federal Funds Rate- amount of interest banks charge each other for loans, usually to cover their reserve requirements so they don’t get fined by the Fed

Open-Market Operations

Buying and Selling US Government Securities by the Fed to affect the money supply

Securities are Government IOU’s such as Treasury bills, notes, and bonds

Government sells securities less money

Government buys back its securities more money in the bank more to lend

Difficulties in Monetary Policy Hard to tell how much money is in

circulation at any given time Fed has sometimes followed a policy

for too long (ex: tight money policy recession)

The Fed is not the only area of government affecting the economy, but rarely do the different parts of government work together