Section 2: The Federal Reserve System Essential Question: How do the actions of the Federal Reserve impact the economy?

The Fed Structure: Structure: 1. 1.A seven-member Board of Governors, who set monetary policy 2. 2.A 12 member Federal Open Market Committee (FOMC) who sets the Fed Funds Rate to be charged by Federal Reserve Banks. All Board members sit on the FOMC.FOMC regional member banks located throughout the U.S.   Missouri- the only state to have 2 fed banks (St. Louis, Kansas City)   Staff economists who provide reports Result of the Federal Reserve Act of 1913.

The Twelve Federal Reserve Districts of the United States

What are the 3 functions of the Fed? 1. Monetary Policy: Controls inflation, without causing recession. –Most important function 2. Financial Services: Is the U.S. Central Bank  Bank that banks use  Bank the U.S. government uses 3. Regulation & Supervision: Supervises nation’s banking system to protect consumers

Inflation A rise in the general level of prices A rise in the general level of prices 2009: $502010: $55 It takes more of our money to purchase the same thing!

How does the Fed affect … The economy? –Because it loans money to banks, it has power to regulate the economy by Making loans expensive (raise interest rates-increases cost of borrowing) Helps control inflation Done if economy is growing too fast. Making loans cheap (lower interest rates-decreases cost of borrowing) Helps economy grow faster if it is slowing down.

How does this impact you? Loan rates increasing or decreasing Loan rates increasing or decreasing –Cost of paying back increase or decrease  College loans  Car loans  Home loans Home values increase or decrease pending loan rates Home values increase or decrease pending loan rates Jobs Jobs –If employers cannot afford to borrow money to pay employees they will lay- off

What’s an interest rate? The monthly effective rate paid on borrowed money. It is expressed as a percentage of the sum borrowed.

Summary The Federal Reserve was created as a central bank of the U.S. The Federal Reserve was created as a central bank of the U.S. It’s main goal is to control inflation through its actions It’s main goal is to control inflation through its actions The Fed impacts the economy and many aspects of our lives both directly and indirectly. The Fed impacts the economy and many aspects of our lives both directly and indirectly.