Bellringer Quiz Notes: Federal Reserve Exit Ticket AGENDA

Students will demonstrate an understanding of the function of the Federal Reserve by identifying at least three roles they have and the three tools they have to help regulate the economy OBJECTIVE

FEDERAL RESERVE “The Bankers Bank”

To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes FEDERAL RESERVE ACT 1913

WHAT DOES THE FED DO? 1.Control the $ supply 2.Supply the economy with paper money. 3.Hold bank reserves 4.Provide check clearing 5.Supervise member banks 6.Serve as “Lender of Last Resort” 7.Monetary policy: actions fed takes to influence level of GDP and rate of inflation

Board of Governors – 7 members appointed by presidents – Staggered 14 yr terms 12 Reserve Districts – Monitors and reports on economic and banking conditions within their district to Board of Governors Member Banks – All national banks required to join – Many join voluntarily – Contribute $ to fed, receive stock (dividends) in system – Banks therefore own Fed reserve not government (no political pressure) STRUCTURE

Longest serving chairman of the federal reserve Ben S. Bernanke began a second term as Chairman of the Board of Governors of the Federal Reserve System on February 1, Dr. Bernanke also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. He originally took office as Chairman on February 1, 2006, when he also began a 14-year term as a member of the Board. His second term as Chairman ends January 31, 2014, and his term as a Board member ends January 31, 2020 BEN BERNANKE

First ever female chairman of FED!! American economist and professor who is the Vice-Chair of FED. Previously, she was President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, Chair of the White House Council of Economic Advisers under President Bill Clinton, and Professor Emerita at the University of California, Berkeley's Haas School of Business. On January 6, 2014, the United States Senate confirmed Yellen's nomination to be Chair of the Federal Reserve Board of Governors; she is slated to be the first woman to hold the position JANET YELLEN

12 FEDER AL RESER VE 12 Federal Reserve Districts

The Fed maintains the checking account for the Treasury Department Processes payments for social security checks, IRS refunds, etc… Sells and regulates bonds, distributes interest payments, deposits funds into checking account BANK OF THE FEDERAL GOVERNMENT

Every check you write goes to the FED if they’re a member bank They verify funds and authenticity, transfer funds, and return check to your bank for your records CHECK CLEARING

Monitors all banking practices of member banks and their reserves Send bank examiners unannounced Study and approve proposed mergers to ensure competition amongst banks Truth-in-lending: Consumers are informed of all interest rates and national averages SUPERVISING LENDING PRACTICES

Banks can borrow money from FED Emergency loans to banks to cover exhausted required reserves Banks only maintain a small amount in reserves (just enough to cover day to day stuff for consumers), rest is lent out to provide interest for bank If bank does not have enough cash on hand during crisis or recession, they can turn to FED LENDER OF LAST RESORT

The average life of a Federal Reserve note depends upon its denomination: – $1 bill - 21 months $5 bill - 16 months – $10 bill - 18 months $20 bill - 2 years $50 bill years – $100 bill years FUN FACT

Why is the Federal Reserve called the “Bankers Bank”? – It’s the bank that banks go to for assistance and regulation What is the structure of the Federal Reserve? – Board of Directions (Janet Yellen), 12 Reserve Districts, Member banks What district are we in? –2–2 Name three responsibilities of the Fed – Issue paper currency, regulate member banks, monetary policy, hold reserves, lender of last resort, check clearing CHECK FOR UNDERSTANDING

People hold on to money because: – Cash needed on hand – Interest rates (investments) – Price levels in economy (inflation) – General level of income (unemployment) Every dollar you hold is one that is not circulating in our economy As inflation rises so does our demand for cash As interest rates rise we are more willing to invest When inflation occurs, more money is needed to cover costs, but too much money can lead to dangerous inflation levels (quantity theory) FED’s job to monitor this situation and produce more money as needed WHY DOES FED NEED TO REGULATE MONEY SUPPLY AND MONETARY POLICY?

Actions to ensure growth in GDP Goal: maximum employment, stable prices, and moderate long-term interest rates MONETARY POLICY

Three tools: – Open Market Operations – Discount Rate – Reserve Requirement TOOLS TO AFFECT MONETARY POLICY

Open Market Operations: – The buying and selling of Government securities (Bonds!) – FED buys from government (increases $ supply bc banks increase lending: have more $ to lend); or – FED sells them back (receives $ back and puts into reserves of bank therefore taking it from government) OPEN MARKET

Discount Rate: – The interest rate a bank must pay to borrow $ from FED – Helps establish Prime (best) bank rates for best customers of member banks – If FED lowers rate, banks are encouraged to loan more (can offer better rates) – IF FED increases rates, banks loan out less (rates less desirable) DISCOUNT RATE

Reserve Requirements – The amount the banks must hold from deposits – FED can increase or decrease RR – Increase: reduces money in supply – Decrease: increases money in supply RESERVE REQUIREMENTS

HOW BANKS MAKE MONEY

Fed ToolMoney Supply Open Market: Buy securities Sell securities Increase $ supply Decrease $ supply Reserve Requirement: Raise RR Lower RR Decrease $ supply Increase $ supply Discount Rate: Raise DR Lower DR Decrease $ supply Increase $ supply TOOLS OF THE FED

REVIEW Progressive Tax Structure Proportional Tax Structure Regressive Tax structure Question: Which tax structure is the most fair in your mind? Why?

FEDERAL BUDGET