Section 1: Organization of the Federal Reserve System Government Bank Established in 1913 Impacts...
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Transcript of Section 1: Organization of the Federal Reserve System Government Bank Established in 1913 Impacts...
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
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.
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
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
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
Federal Open Market Committee 12 voting members Meet 8x a year Determines whether or not to adjust
interest rates
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
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
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
Section 2: Money Supply and the Economy Loose v Tight Money Policies
Loose Money Policy Tight Money Policy
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
Regulating the Money Supply Three Ways:
Changing the Reserve Requirements Changing the Discount Rate Open-Market Operations
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
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.
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
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
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