The Federal Reserve“The Fed”

The Fed

• The Federal Reserve is our nation’s bank

• Their customers are:1. The Government

2. Banks – Wells Fargo, Bank of America

History

• Federal Reserve Act of 1913– Set up the Federal Reserve– 12 independent regional banks– Did not work because they were too

independent• Restructured in 1935 as The Fed today• Centralized banks: Banks work together

Structure of the Fed

• Board of Directors – Chairman is Ben Bernanke

• In D.C.

• 14 year terms (appointed by the Pres.)

Structure cont.

12 District Banks

-monitor and report about its members banks

Members Banks

-nationally chartered banks must join The Fed

- FDIC

Functions of the Fed

• Serve Government– Federal Governments bankers– Sell bonds– Issue currency

Functions

• Serve Banks– Clear checks– Supervise lending– Lender of last resort ( lend banks $$$)

Functions

• Regulate Banks– Control the money supply– Bank examinations

Functions

• Regulate the money supply– Stabilize the economy– Lessen the negative effects of the business

cycles– Control inflation/keep purchasing power

strong

3 Monetary tools to expand/contract our economy

• Required reserve ratio (RRR)– Amount that banks must keep from each

deposit

An increase in the RRR will cause a decrease in the money supply(contract)

3 Monetary tools to expand/contract our economy

• Discount Rate– Interest rate The Fed charges banks to

borrow money

An increase in the discount rate will decrease the money supply (contract)

3 Monetary tools to expand/contract our economy

• Open Market Operations– Buying and selling of govt. securities to alter

the supply of money

Buying will result in an increase in the money supply (expand).

Fiscal Policy to help expand/contract our economy

• Fiscal Policy – Controlled by the President and Congress by taxing and spending (budgets)

• Expand the economy by decreasing taxes and increasing government spending

• Contract the economy by increasing taxes and decreasing government spending

• What is the purpose if the Govt imposes a significant tax on alcohol?– Decrease the supply of alcohol (tax incentive)