Banksand the

Federal Reserve Systema.k.a The Fed

SOL CE: 10c 11d

The student will demonstrate knowledge of the US economy by explaining how the Federal Reserve System works with private

financial institutions to regulate the money supply.

Banking/FED Vocabulary:• Deposit- saving money in a bank

• Loan- borrowing money from the bank

• Interest- what banks PAY you for your DEPOSITS and what they CHARGE you for a LOAN

Banking/FED Vocabulary:• Banks- businesses that profit by

taking deposits in order to make loans

• Savings and Loans- takes deposits to make mortgage (home) loans

• Credit Unions- non-profit business owned by the customers

• Securities Brokerages- businesses that advise people on buying stocks

Banking/FED Vocabulary:• Reserve Requirement- how much

money a bank is forced to keep back and not loan out

• Discount Rate- the interest rate the Fed charges a bank to borrow money from them

• Government Securities- bonds/notes the government sells to help pay for its expenses

3 Characteristics of Private Financial Institutions:

1. Banks act as “go betweens”/ intermediaries for savers and borrowers.

2. Banks receive deposits and make loans.

3. Banks encourage saving and investing by paying interest (money) on deposits.

THE FEDERAL RESERVE SYSTEM• The Federal Reserve System (Fed) is

the “banker’s bank”, the central bank of the United States.

• The Fed’s purpose is to keep the economy stable by regulating the amount of money in circulation.

Federal Bank Locations and the regions they serve

THE FEDERAL RESERVE SYSTEM

• The Fed slows the economy by restricting/decreasing the money supply.

• The Fed stimulates/grows the economy by increasing the money supply.

The Fed slows the economy by taking money out of circulation:

1. Increasing the reserve

requirement

(banks keep more $)

2. Increasing

the discount rate

(banks pay more to

borrow $)

3. Selling gov’t.

securities

(less money

put into circulation)

The Fed takes money out of the economy…

•Slows the economy by: increasing reserve, increasing discount, selling bonds.

The FED stimulates/grows the economy by putting money into circulation:

1. Lowering

the reserve requirement

(banks lend more $)

2. Lowering the discount rate

(Banks pay less to

borrow $)

3. Purchasing

gov’t. securities

(more money put into

circulation)

The Fed puts money into the economy by…

•Stimulates the economy by: lowering reserve, lowering discount, buying bonds