Ch. 14 The Federal Reserve

Federal Reserve System (FED) a. established to protect the savings of the American people in the event of a bank failure b. the Constitution gives congress the authority to print money c. National Bank of the United States d. Divided into 12 districts

Federal Reserve Cont’d e. the board of directors are appointed by the president f. current chairman is Janet Yellen g. the current FDIC limit per customer is $250,000

Money Supply h. Attempts to control the money supply to prevent Inflation (increase spending, & prices, decrease in value of money) recession (decrease spending, prices, increase in unemployment)

Major duties of the Fed a. Print paper money b. Regulate & supervises member banks c. Acts as the governments bank d. Check clearing services

Fed Duties Continued e. Hold reserve accounts for member banks 1. bank’s checking account at the Fed 2. % of money that can’t be lent out/keeps banks “healthy” 3. Fed sets the rate (reserve requirement) 4. Banks use their excess reserves to make loans/make profit

Fed Duties Continued f. Maintains the money supply (Monetary Policy) 1. determines how much money will be in circulation 2. too much causes inflation -need to decrease money supply (tight money policy) 3. too little causes recession/depression/unemployment -need to increase money supply (easy money policy)

Conducting Monetary Policy 4. Methods used: a. Change the reserve requirement -amount banks have for loans Reserve Requirement (R.R.) - Decrease R.R. = Money Supply (allows more loans b/c it frees up reserves) - Increase R.R. = Money Supply (forces banks to hold more $$$ in reserves).

Monetary Policy cont’d 2nd method used: B. Open-market operations -buy/sell govt. securities (bonds) Open-market operations Buy govt. securities = Money Supply Sell govt. securities = Money Supply

Monetary Policy cont’d Final method used: c. Change discount rate -interest rate charged to banks for taking loans Changing the discount rate (D.R.) - Decrease discount rate = Money Supply (encourages banks to loan out more $$$) - Increasing the discount rate = Money Supply (makes banks less willing to borrow $$$ from the Fed)