2. Section 1: Organization of the Federal Reserve System  Government Bank  Established in 1913  Impacts how you spend, invest, and borrow money  Is in charge of the nation’s monetary policy  Determines how much money is available, how easily it can be borrowed, and how costly it will be

3. Organization of the Federal Reserve System  The Federal Reserve System is made up of a Board of Governors assisted by the Federal Advisory Council, the Federal Open Market Committee, 12 Federal Reserve District Banks, 25 branch banks, and about 4000 member banks.

4. Monetary Policy  Involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit

5. Board of Governors  Directs operations of the Fed  Supervises the 12 Federal Reserve District Banks  Regulates member banks  7 full-time members are appointed by President, approved by Senate, serve for 14 years. Members cannot be reappointed  no political pressure

6. Federal Advisory Council  Assist the Board of Governors  12 members elected by the directors of each Federal Reserve District Bank  Meet 4x a year  Report on general business conditions of the nation

7. Federal Open Market Committee  12 voting members  Meet 8x a year  Determines whether or not to adjust interest rates

8. Federal Reserve Banks  12 Federal Reserve Districts- each has a bank  Set up as a corporation owned by member banks  9 person board of directors supervises each  Also includes 25 Federal Reserve branch banks

9. Member Banks  All national banks (chartered by federal Government) are required to become members of the Federal Reserve System  Banks chartered by states may join if they choose to  Member banks must buy stock in it’s district’s Federal Reserve Bank, but they also get to vote for 6 of the 9 directors

10. Functions of the Federal Reserve  Clearing Checks  Acting as the Federal Government’s fiscal agent  Supervising member banks  Holding reserves and settling reserve requirements  Supplying paper currency  Regulating the money supply  Consumer Protection

11. Section 2: Money Supply and the Economy  Loose v Tight Money Policies  Loose Money Policy  Tight Money Policy

12. Loose Money Policy Borrowing is Easy Consumers buy more Businesses expand More people are employed People spend more Inflation

13. Tight Money Policy Borrowing is difficult Consumers buy less Businesses postpone expansion Unemployment increases Production is reduced Recession

14. Fractional Reserve Banking  System in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend  This is why you suffer a penalty if you withdraw all of your money at once without notice  Your money (deposits) is lent out by the bank  the bank earns interest on the loan  you receive some of that interest

15. Money Expansion  Banks use excess reserves to create new money

16. Regulating the Money Supply  Three Ways:  Changing the Reserve Requirements  Changing the Discount Rate  Open-Market Operations

17. Changing the Reserve Requirements  Increasing or decreasing the money supply will affect how much “new” money can be made, as we saw in the table

18. Changing the Discount Rate  The Fed can raise or lower the discount rate, interest rate that the Fed charges on loans to member banks, making it more or less appealing to member banks to request loans  Member banks may need loans if they have dropped below the reserve requirement because a customer suddenly withdrew all their money  If member banks expect a “run” on the banks, they won’t lend out as much so that they will have enough there to give to customers and they won’t need a loan from the Fed.

19.  Prime Rate- amount of interest banks charge on loans to their best customers  Federal Funds Rate- amount of interest banks charge each other for loans, usually to cover their reserve requirements so they don’t get fined by the Fed

20. Open-Market Operations  Buying and Selling US Government Securities by the Fed to affect the money supply  Securities are Government IOU’s such as Treasury bills, notes, and bonds  Government sells securities  less money  Government buys back its securities  more money in the bank  more to lend

21. Difficulties in Monetary Policy  Hard to tell how much money is in circulation at any given time  Fed has sometimes followed a policy for too long (ex: tight money policy  recession)  The Fed is not the only area of government affecting the economy, but rarely do the different parts of government work together