1. The Federal Reserve System
The central bank of the United States responsible for regulating the banking industry
Controlled by a 7-member board of governors who are appointed by the president and confirmed by the Senate to serve 14-year terms
Composed of 12 district banks and 25 branch banks
District banks are owned by commercial banks that are members of the Federal Reserve system
Main function is to regulate the nation’s money supply by controlling bank reserves requirements, regulating the discount rate, and running open-market operations
Copyright © Cengage Learning. All rights reserved

2. Federal Reserve System
Copyright © Cengage Learning. All rights reserved

3. The Federal Reserve System (cont’d)
Regulation of reserve requirements
Reserve requirement—the percentage of its deposits a bank must retain, either in its own vault or on deposit with its Federal Reserve District Bank
More required reserves = less money in circulation
Less required reserves = more money in circulation to stimulate the economy
Copyright © Cengage Learning. All rights reserved

4. The Federal Reserve System (cont’d)
Regulation of the discount rate
Discount rate—the interest rate the Federal Reserve System charges for loans to its member banks
Lower loan rates allow banks to lend more and stimulate the economy
Higher rates slow the economy and check inflation
Copyright © Cengage Learning. All rights reserved

5. The Federal Reserve System (cont’d)
Open-market operations
The buying and selling of U.S. government securities by the Federal Reserve System for the purpose of controlling the supply of money
To reduce the money supply, the Fed sells government securities on the open market to take money out of circulation
To increase the money supply, the Fed buys government securities
Copyright © Cengage Learning. All rights reserved

6. The Federal Reserve System (cont’d)
Other Fed responsibilities
Serving as the U.S. government bank
Clearing checks and electronic transfers of funds between banks
Inspection and replacement of worn and unfit currency
Selective credit controls
Truth-in-Lending Act enforcement
Stock purchase margin requirements
Copyright © Cengage Learning. All rights reserved

7. Controlling the Money Supply and the Economy
Copyright © Cengage Learning. All rights reserved