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Chapter MenuChapter IntroductionSection 1:Organization and Functions of the FedSection 2:Money Supply and the EconomySection 3:Regulating the Money SupplyVisual Summary

Chapter Intro 1Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.

Chapter Intro 2In this chapter, read to learn about who is in charge of the U.S. money supply and how they decide how much currency to put into circulation.

Chapter Preview-End

Section 1-Main IdeaSection PreviewIn this section, you will learn about how the Federal Reserve System, or Fed, is organized, and its role in determining the nations monetary policy.

Section 1-Key TermsFedmonetary policyFederal Open Market Committee (FOMC)check clearing Content Vocabulary

Section 1-Key TermsassistnetworkAcademic Vocabulary

ABCSection 1-Polling QuestionAre you familiar with the Federal Reserve System? A.Very familiarB.Somewhat familiarC.Not at all familiar

Section 1Organization of the Federal Reserve SystemThe Federal Open Market Committee of the Federal Reserve is responsible for implementing monetary policy.

Section 1The Federal Reserve System, or Fed, is a system, or network, of banks that share power.The Fed is responsible for monetary policy in the United States.Organization of the Federal Reserve System (cont.)View: Organization of the Fed

Section 1The Board of Governors, consisting of 7 full-time members appointed by the president, directs the operation of the Fed.They are assisted by the Federal Advisory Council (FAC)12 members elected by the directors of each Federal Reserve district bank.Organization of the Federal Reserve System (cont.)

Section 1The Federal Open Market Committee (FOMC) has 12-voting members that meet 8 times a year to decide the course of action that the Fed should take to control the money supply. Organization of the Federal Reserve System (cont.)The nation is divided into 12 Federal Reserve districts, with each district having a Fed district bank.View: The Federal Reserve System

Section 1Each district bank is set up as a corporation owned by its member banks.Organization of the Federal Reserve System (cont.)The system also includes 25 Federal Reserve branch banks.All national banks are required to become members of the Federal Reserve System.

ABCDSection 1Who is responsible for determining interest rates? A.The Board of Governors B.The Federal Advisory Council C.The Federal Open Market CommitteeD.The President

Section 1Functions of the Fed The primary function of the Federal Reserve is to control the money supply.

Section 1Functions of the Fed (cont.)Functions of the Federal Reserve:Check clearingActing as the federal governments fiscal agentSupervising banksHolding reserves and setting reserve requirementsView: How a Check Clears

Section 1Functions of the Fed (cont.)Supplying paper currencyRegulating the money supplySets standards for certain types of consumer legislationView: Functions of the Fed

ABSection 1Should the Fed have such a broad role, or should its responsibilities be split up between different agencies? A.Keep the same B.Split into different agencies

Section 1-End

Section 2-Main IdeaSection PreviewIn this section, you will learn how the Fed controls the money supply and interest rates.

Section 2-Key Termsloose money policytight money policyfractional reserve bankingreserve requirementsContent Vocabulary

Section 2-ObjectivesfunctionportionAcademic Vocabulary

ABCSection 2-Polling QuestionDo you know why changes in the interest rate are so important?A.YesB.SomewhatC.Not at all

Section 2Loose and Tight Money Policies The goal of monetary policy is to promote economic growth and employment without causing inflation.

Section 2Loose and Tight Money Policies (cont.)Credit, like any good or service, has a costthe interest that is paid to obtain it.If the Fed implements a loose money policy (often called expansionary) credit is abundant and inexpensive to obtain, possibly leading to inflation.View: Balancing Monetary Policy

Section 2Loose and Tight Money Policies (cont.)If the Fed implements a tight money policy (also called contractionary), credit is in short supply and is expensive to obtain, which slows the economy.

ABSection 2If more people are employed, borrowing is easy, and people spend more, which type of policy is in effect? A.Loose B.Tight

Section 2Fractional Reserve Banking Banks are not required to keep 100 percent reserves to back their deposits.

Section 2Fractional Reserve Banking (cont.)The banking system is based on fractional reserve banking.Many banks have reserve requirements. A larger portion of the money supply consists of funds that the Feds and customers deposit in banks.Banks may only keep 10% of the deposits in reserve, so they use the remaining 90% in reserves to create new money.

Section 2Fractional Reserve Banking (cont.)When each bank uses the non-required reserve portion of money deposits to make loans to businesses and individuals, the process is known as the multiple expansion of the money supply.View: Expanding the Money Supply

ABCDSection 2Banks must hold money in reserve in case _____. A.of a national emergency or disasterB.another bank runs out of money or closes C.many customers withdraw large amounts at the same timeD.the government needs to borrow money due to the national debt

Section 2-End

Section 3-Main IdeaSection PreviewIn this section, you will learn about several tools that the Fed uses to control the size of the U.S. money supply

Section 3-Key Termsdiscount rateprime ratefederal funds rateopen-market operations Content Vocabulary

Section 3-ObjectivesprecisecontractAcademic Vocabulary

ABCSection 3-Polling QuestionDo you feel that the actions of the Fed impact your daily life?A.YesB.SomewhatC.Not at all

Section 3Changing Reserve Requirements The Fed can change the growth rate of the money supply by changing reserve requirements on bank deposits.

Section 3Changing Reserve Requirements (cont.)The Federal Reserve can choose to control the money supply by changing the reserve requirements of financial institutions.If the Fed raises the reserve requirements, it would decrease the amount of money in the economy.If the Fed lowers the reserve requirements, it would increase the amount of money in the economy.

View: Raising and Lowering Reserve Requirements

ABCDSection 3Why has changing the reserve requirement not been used to regulate the money supply lately?A.It happens too quickly. B.It takes too long.C.It is not precise enough.D.It is too precise.

Section 3Changing the Discount Rate The Fed can change the growth rate of the money supply by changing short-term interest rates.

Section 3Changing the Discount Rate (cont.)If a bank does not have enough reserves to meet its reserve requirement, it can ask the Federal Reserve district bank for a loan. If the discount rate is high, the bank passes its increased costs on to customers in the form of higher interest rates on loans.

Section 3Changing the Discount Rate (cont.)Banks might raise their prime rate.High interest rates discourage borrowers and may keep down the growth of the money supply.Low interest rates encourage borrowers and may lead to growth of the money supply.

Section 3Changing the Discount Rate (cont.)Changing the reserve requirement or the discount rate is now rarely used by the Fed.Rather, the Fed states periodically that it is going to change the federal funds rate.If the Fed causes the federal funds rate to drop, banks will borrow more and, thus, lend moreand vice versa.View: Federal Funds Rate

ABCDESection 3Why do banks need to borrow from each other?A.In case a customer withdraws a large amount. B.To keep its reserves at the correct level.C.To maintain good interest rates. D.A & BE.B & C

Section 3Open-Market Operations The Fed controls the money supply primarily through the purchase and sale of government securities.

Section 3Open-Market Operations (cont.)The major tool the Fed uses to control the money supply is a practice known as open-market operations.When the Fed buys securitiessuch as Treasury bills, notes, and bondsit pays for them by making a deposit in the dealers bank.This increases the banks reserves, thus increasing the money supply.

Section 3Open-Market Operations (cont.)When the Fed sells Treasury bills to a dealer, the dealers bank must use its deposits to purchase securities.This decreases the banks reserves, thus decreasing the money supply.Some people feel that the Fed should not engage in monetary policy due to misjudgments in the past.

Section 3Open-Market Operations (cont.)The spending and taxing policies of the federal government also affect the economy.

ABCDSection 3How many months pass before a monetary policy change is felt?A.2 B.6C.10D.12

Section 3-End

VS 1The primary function of the Federal Reserve System is to control the money supply, but it has other responsibilities as well.

VS 2The Fed can implement either a loose or tight money policy to try to promote economic growth and employment.

VS 3The Fed has several tools at its disposal to use to regulate the money supply.

VS-End

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Concept Trans MenuEconomic Concepts TransparenciesTransparency 18Monetary PolicySelect a transparency to view.

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Vocab1Fed: the Federal Reserve System created by Congress in 1913 as the nations central banking organization

Vocab2monetary policy: policy that involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit

Vocab3Federal Open Market Committee (FOMC): 12-member committee in the Federal Reserve System that meets 8 times a year to decide the course of action that the Fed should take to control the money supply

Vocab4check clearing: method by which a check that has been deposited in one institution is transferred to the issuers depository institution

Vocab5loose money policy: monetary policy that makes credit inexpensive and abundant, possibly leading to inflation

Vocab6tight money policy: monetary policy that makes credit expensive and in short supply in an effort to slow the economy

Vocab7fractional 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

Vocab8reserve requirements: regulations set by the Fed requiring banks to keep a certain percentage of their checkable deposits as cash in their own vaults or as deposits in their Federal Reserve district bank

Vocab9discount rate: interest rate that the Fed charges on loans to commercial banks and other depository institutions

Vocab10prime rate: rate of interest that banks charge on loans to their best business customers

Vocab11federal funds rate: interest rate that banks charge each other on loans (usually overnight)

Vocab12open-market operations: buying and selling of United States securities by the Fed to affect the money supply

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