Federal Reserve provides the following functions:  Provides financial services to banks and other financial institutions  Regulates banks  Maintains stability of the financial system  Conduct Monetary Policy to prevent extreme fluctuations in the economy

 I: Reserve Requirement : reserve of money banks must have on hand per depositor.  10% is the current reserve ratio  Federal Funds Market: allows banks to borrow funds from other banks if they fall short  Federal Funds rate: interest rate at which funds are borrowed and lent in the federal funds market.  To alter the money supply the FED will lower or raise the reserve requirement.  Discount rate : interest rate FED charges on loans to banks. Usually 1% higher than federal funds rate –to keep banks from borrowing from the FED

 Federal Reserve buys or sells US Treasury bills  Fed buys or sells through banks not directly from Federal Government  The buying or selling of treasury bills does not directly affect money supply ---it affects the money multiplier by setting it in motion.  When the Fed buys treasury bills from banks it increases the monetary base because it increases bank reserves  When the Fed sells T bills to banks it debits the bank’s accounts reducing their reserves-this takes money out of the base.

Poster Creation Requirement Problem: The Fed wants to increase the money supply. Decision: How should you accomplish this? What tools did you choose? Why?  Create a poster to advertise for the Fed’s choice (your choice) on how to increase the monetary policy and include three arguments why people should be accepting of this choice  Include a nonlinguistic representation and an overview of who “the Fed” is.

Remember: Fiscal Policy is the Federal Government and Monetary Policy is the Federal Reserve