1. The Federal Reserve

2. 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

3. How is the Fed structured?  overseen by 7-member Board of Governors  12 districts – 1 Federal Reserve bank per district

4.  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

5. 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

7. ccheck clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now

8. 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

9. 1. Discount Rate TThe interest rate that banks pay to borrow money from the Federal Reserve RReducing the discount rate – encourages people to borrow money -> increases money supply & helps economy grow **used during recession** - period of contraction

10. IIncreasing discount rate – discourages borrowing -> decreases money supply & slows economy down *** used during periods of inflation*** -- period of expansion & rising prices

11. 2. Required Reserve Ratio  t 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

12. 3. Open Market Operations  the buying and selling of government bonds with Federal Reserve Funds wwhen the Fed buys bonds, more money is put into circulation – helps the economy grow wwhen the Fed sells bonds, money is taken out of circulation – makes the economy slow down