1. The Federal Reserve System
-established in 1913 by the
Federal Reserve Act
-central bank of the U.S.
-12 district banks with 37
additional branches and offices.
-Board of Governors

3. Functions of the Fed
1. Distributes currency
2. Checks for counterfeits
3. Processes checks
4. Houses acct. of U.S. gov’t
5. Writes checks for U.S. gov’t
6. Sells t-notes, t-bills, t-bonds
7. Sells savings banks

4. 8. Examines banks for fed regulations
9. Studies economic issues to advise
Congress
10. Writes federal gov’t payroll
checks.
11. Processes tax return checks
12. Destroys old money.
Controls money supply
(monetary policy)

5. *As interest rates rise, what will happen to the amount
of loans taken by businesses and consumers? Why?
*How will high interest rates affect consumer spending,
jobs, and the economy as a whole? Explain.
*As interest rates fall, what will happen to the amount
*How will low interest rates affect consumer spending,
jobs, and the economy as a whole? Explain?

6. Federal Reserve Tools for Money
Management
1. Reserve Requirement--amount
of deposits a bank must keep on
reserve.
-only Fed can change %
-lower reserve, more money out
-higher reserve, less money out.

7. 2. Open Market Operations--the
buying and selling of gov’t securities
in the bond market.
-Fed buys bond, more money in
circulation
-Fed sells bond, takes money out
of circulation.

8. 3. Discount Rate--amount the
Fed charges to member banks on
loans.
-lower loan rate, banks borrow
more so they lend more.
-higher loan rate, banks borrow
less so they lend less.

9. 4. Moral Persuasion--use of
announcements & intimidation by
press releases, newspapers, and
congressional testimony.
-If warning of reserve requirement,
banks might begin to keep more and
loan less.
-weakest tool, but keeps bankers on
their toes.