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Chapter 16 Section 2 Functions of the Federal Reserve.

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Presentation on theme: "Chapter 16 Section 2 Functions of the Federal Reserve."— Presentation transcript:

1 Chapter 16 Section 2 Functions of the Federal Reserve

2 Functions of the Federal Reserve
Lending Money Banks often lend to each other on short-term basis In natural disaster, all banks in region lack cash flow Fed lends to banks with enough assets and capital to qualify Small banks with seasonal cash flow needs may borrow from Fed Fed serves as lender of last resort to prevent banking crisis

3 Functions of the Federal Reserve
Regulating and Supervising Banks Fed banks supervise state-chartered members, bank holding companies bank holding company owns, has controlling interest in several banks Fed banks enforce truth-in-lending laws Conduct bank exams—audit financial practices of banks in district Monitor bank mergers to ensure competition

4 Serving the Federal Government
KEY CONCEPTS Fed serves as federal government’s banker helps carry out taxation and spending activities

5 Serving the Federal Government
Service 1: Paying Government Bills Tax revenues are deposited with the Fed Fed issues checks, makes electronic payments via U.S. Treasury for transfer payments, employee wages, direct spending, tax refunds deducts amounts from government’s account Processes postal money orders, food stamps

6 Serving the Federal Government
Service 2: Selling Government Securities Fed processes U.S. savings bonds, auctions other securities provides information, collects payment, credits funds, delivers bonds Pays interest on bonds Federal Open Market Committee (FOMC) supervises sales of securities purpose is to stabilize the economy

7 Serving the Federal Government
Service 3: Distributing Currency Federal Reserve notes are official paper currency of U.S.: fiat money Treasury Department prints notes that go to Fed district banks Fed banks distribute notes to depository institutions in amounts needed currency then goes to people and businesses Fed also distributes coins produced by U.S. Mint

8 Creating Money Creating money—how money enters circulation through deposits, loans Fed establishes required reserve ratio (RRR) for banks fraction of bank’s deposits that it must keep in reserve Reserve 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 loan Level of the RRR determines how much money may be loaned Money supply increases by total loans made after initial cash deposit deposit multiplier formula tells how much money supply will increase


12 Questions Why 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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