Easy question….. When people need money or want to store money, what do they use? Banks! …What do banks do when they need or want to store money? Do banks have banks? …does the federal government have a bank? YES! The Federal Reserve!

The Federal Reserve System Aka “The Fed”

What is it? Central bank of the U.S. – Made up of several district and regional banks

Controlling Money Supply The Fed can buy or sell government bonds from/to banks, corporations, or other investors – Buying & selling of bonds impacts the money supply in the economy – More on this later in the unit

Monitoring Reserves Reserves – Money owned by banks that is stored in their own bank vaults or at the Federal Reserve banks – Banks are required to keep reserves (more on this later in the chapter) Fed makes sure banks have enough reserves

Payment System Helps process checks and electronic transfers between banks The Fed serves as the intermediary between banks in the process (middle-man) How does this work? – I need 5 volunteers

Quick Review 1.What exactly is the Federal Reserve? – The central bank of the United States 2.How does the Federal Reserve control the money supply in the economy? – Buying or selling bonds 3.What are reserves? – Money banks store in their vaults or at the Federal Reserve 4.What role in the payment process does the Federal Reserve have? – Middle man (Intermediary)

Check Clearing Process Check is given from person A to person B Person B deposits check at his bank (Bank X) – Bank X adds the check value to Person B’s account Bank X sends check to Federal Reserve Bank – Fed adds the check’s value to Bank X’s reserve amount – Fed subtracts the check’s value from Bank Y’s reserve amount (Person A’s bank) – Fed sends check to Bank Y Bank Y receives the check – Reduces the check’s value from Person A’s account

Structure Divided into 12 district Federal Reserve banks – Divided into 25 regional Federal Reserve banks Controlled by a Board of Governors (7 members) – Led by the Federal Reserve Chairman Appointed by the president, but independent from the government Owned by member banks – Commercial banks who are given stock in the Fed – Receive dividends (share of profits) – About 3,000 member banks