The Federal ReserveThe Federal Reserve is called “the lender of last resort”…what does this mean?

7 Board of Governors & 1 Chair person

Ben BernakeJanet Yellen

12 Federal Reserve Districts

Federal Open Market Committee (FOMC)

12 Person Committee

7 are the members of the Board of Governors

5 are heads of the District Banks

They make most policy (or rules and regulations) about the economy

So what does the Fed do?

1. Control the money supply• How much cash is made available

2. Supply the economy with paper money (Reserve Notes)

3. Hold Bank Reserves• Glen Rock Savings Bank must keep a reserve account at

its District Reserve Bank

4. Provide check-clearing services

5. Supervise member banks• Make sure they’re following the rules

6. Serve as the lender of last resort• If Glen Rock Savings loses all of it’s money and can’t

borrow from another local bank the Fed will lend it money

Adjusting the Money Supply

Creating Money (not just PRINTING IT)

Bank C keeps $81 in Reserve; lends out $730 to Max

Max buys new Surf Board from Claire Claire deposits money into Bank D

Bank B keeps $90 in Reserve; lends out $810 to CindyCindy buys new couch from Alan Alan deposits money into Bank C

Federal Reserve issues $1,000 to Bank ABank A gives $900 loan to Tim to

buy TVTim buys TV from Jeff; Jeff brings

money to Bank B

From $1,000 banks have created over $3,600 in loans and reserves!!

3 “buttons” to push

Changing the Reserve RequirementHow much do banks HAVE to keep in their reserve?

The less they have to keep in reserve the more they have to lend out The more money people will borrow and spend

Open Market OperationsGovernment buys/sells Securities (bonds; or IOU’s for future payments)

Money can appear/disappear out of thin air!

Changing the Discount RateHow much interest the Fed will charge on loans to banks

Open Market Sales

The Fed wants to take money out of the economy to reduce spending

They will SELL securities; you buy it for $10,000 and write a check

Fed then takes that $10,000 check; deposits into their account and ERASES the $10K from existence.

Less money is now in the market

Look up Quantitative Easing. What kind of Fed policy is this?