Presentation on theme: "Chapter 16 Section 2 Functions of the Federal Reserve."— Presentation transcript:
1 Chapter 16 Section 2Functions of the Federal Reserve
2 Functions of the Federal Reserve Lending MoneyBanks often lend to each other on short-term basisIn natural disaster, all banks in region lack cash flowFed lends to banks with enough assets and capital to qualifySmall banks with seasonal cash flow needs may borrow from FedFed serves as lender of last resort to prevent banking crisis
3 Functions of the Federal Reserve Regulating and Supervising BanksFed banks supervise state-chartered members, bank holding companiesbank holding company owns, has controlling interest in several banksFed banks enforce truth-in-lending lawsConduct bank exams—audit financial practices of banks in districtMonitor bank mergers to ensure competition
4 Serving the Federal Government KEY CONCEPTSFed serves as federal government’s bankerhelps carry out taxation and spending activities
5 Serving the Federal Government Service 1: Paying Government BillsTax revenues are deposited with the FedFed issues checks, makes electronic payments via U.S. Treasuryfor transfer payments, employee wages, direct spending, tax refundsdeducts amounts from government’s accountProcesses postal money orders, food stamps
6 Serving the Federal Government Service 2: Selling Government SecuritiesFed processes U.S. savings bonds, auctions other securitiesprovides information, collects payment, credits funds, delivers bondsPays interest on bondsFederal Open Market Committee (FOMC) supervises sales of securitiespurpose is to stabilize the economy
7 Serving the Federal Government Service 3: Distributing CurrencyFederal Reserve notes are official paper currency of U.S.: fiat moneyTreasury Department prints notes that go to Fed district banksFed banks distribute notes to depository institutions in amounts neededcurrency then goes to people and businessesFed also distributes coins produced by U.S. Mint
8 Creating MoneyCreating money—how money enters circulation through deposits, loansFed establishes required reserve ratio (RRR) for banksfraction of bank’s deposits that it must keep in reserveReserve may be stored as cash in bank’s vault or deposited with Fed
10 Creating Money Example: Money Creation Banking system creates money whenever banks get deposit and make loanLevel of the RRR determines how much money may be loanedMoney supply increases by total loans made after initial cash depositdeposit multiplier formula tells how much money supply will increase
12 QuestionsWhy might the Fed help a small bank in an agricultural region stabilize its cash flow?How are the banking services the fed provides to the government similar to the services it provides to banks?If the Fed raised the RRR from 10% to 12%, how would it affect the money supply?You have been planning your college finances and you know that you’ll have to take a bank loan to cover tuition costs. You read that the Fed intends to raise the RRR rate from 10% to 20%. How will this change affect the money supply and your ability to borrow money for college tuition?
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