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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