The Federal Reserve System -established in 1913 by the Federal Reserve Act -central bank of the U.S. -12 district banks with 37 additional branches and offices. -Board of Governors

Functions of the Fed 1. Distributes currency 2. Checks for counterfeits 3. Processes checks 4. Houses acct. of U.S. gov’t 5. Writes checks for U.S. gov’t 6. Sells t-notes, t-bills, t-bonds 7. Sells savings banks

8. Examines banks for fed regulations 9. Studies economic issues to advise Congress 10. Writes federal gov’t payroll checks. 11. Processes tax return checks 12. Destroys old money. Controls money supply (monetary policy)

*As interest rates rise, what will happen to the amount of loans taken by businesses and consumers? Why? *How will high interest rates affect consumer spending, jobs, and the economy as a whole? Explain. *As interest rates fall, what will happen to the amount *How will low interest rates affect consumer spending, jobs, and the economy as a whole? Explain?

Federal Reserve Tools for Money Management 1. Reserve Requirement--amount of deposits a bank must keep on reserve. -only Fed can change % -lower reserve, more money out -higher reserve, less money out.

2. Open Market Operations--the buying and selling of gov’t securities in the bond market. -Fed buys bond, more money in circulation -Fed sells bond, takes money out of circulation.

3. Discount Rate--amount the Fed charges to member banks on loans. -lower loan rate, banks borrow more so they lend more. -higher loan rate, banks borrow less so they lend less.

4. Moral Persuasion--use of announcements & intimidation by press releases, newspapers, and congressional testimony. -If warning of reserve requirement, banks might begin to keep more and loan less. -weakest tool, but keeps bankers on their toes.