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Y’all better learn ‘bout dem Benjamins. Explain the reasons for the creation of the Federal Reserve System and its importance to the economy. Indicator: 10th, 4-4

Federal Reserve System Established in 1913 to help control the nation’s money supply. Controls the ability of banks to lend money. The Fed lends money to banks at its own interest rate.

There are 12 Federal Reserve Banks- nations banks can store cash & reserves here. Also, they can borrow $$ for short term loans.

Federal Reserve sets the reserve requirement- the percentage of deposits that banks can lend and the percentage they must keep in reserve (in the vault). Federal Reserve also sets interest rates (discount rate)- amount of $ paid back with loan.

In poor economic times (depression, recession), the Fed can make more $$ available in 2 ways: “Loose” Money Policy Consumers & businesses will borrow more & spend more Lower its interest rate(discount rate) Lower the reserve requirement. Banks can lend more $ out.

When the economy is going too good (prices  too quick- inflation), the Fed has two options: Banks have less money to lend out 1. Raise its interest rates (discount rate). This reduces the nation’s money supply and slows the economy (less borrowing so less spending). 2. Raise the reserve requirement “Tight” Money Policy

A newspaper headline states, “Federal Reserve Decides to Reduce the Money Supply; Slowing of the Economy Likely Impact.” According to the headline, the Federal Reserve Wants banks to reduce lending. Thinks the unemployment rate is too high. Wants banks to give more customers loans. Hopes that consumers will decide to spend more.

Federal Reserve reduces the $$ supply Economic Upswing Interest rates __________ Economic growth is slowed to avoid _________ rise inflation Businesses borrow _______ less

Federal Reserve puts more $$ into circulation Consumers borrow ____ to spend on cars,homes, etc. more Economic Downturn Interest rates go _______ down Businesses borrow ______, stimulating production more

One way in which the Federal Reserve System seeks to influence the U.S. economy is by raising or lowering the rate of interest (discount rate) that member banks must pay to borrow money from the federal reserve. Considering that the inflation rate rose significantly from 1976 to 1980, identify the change (increase or decrease) the Federal Reserve System could have made in the discount rate to reverse that trend. Describe the expected impact this change in the discount rate would have on o Consumer spending o Business spending Explain why this change in the discount rate would produce the desired effects on spending.