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The Federal Reserve. What is the Federal Reserve??. central bank of the US created in 1913 by an act of Congress & restructured after the Great Depression created to provide a safer, more flexible and more stable monetary & financial system. How is the Fed structured?.

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Presentation Transcript
what is the federal reserve
What is the Federal Reserve??
  • central bank of the US
  • created in 1913 by an act of Congress &

restructured after the Great Depression

  • created to provide a safer, more flexible

and more stable monetary & financial

system

how is the fed structured
How is the Fed structured?
  • overseen by 7-member Board of Governors
  • 12 districts – 1 Federal Reserve bank per district
slide4

Member banks – all nationally chartered banks must join the Federal Reserve system

-- contribute funds & receive stocks & dividends from the system

-- Federal Reserve System is owned by banks, not government

what is the fomc
What is the FOMC?
  • Federal Open Market Committee

-- Board of Governors of the Fed Reserve & 5 district bank presidents

-- make key decisions about interest rates

& the growth of the US money supply

slide7
check clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now
what is monetary policy
What is Monetary Policy?
  • the actions taken by the federal reserve to regulate the economy
  • 3 monetary policy tools:

1. Discount Rate

2. Required Reserve ratio

3. Open Market Operations

1 discount rate
1. Discount Rate
  • The interest rate that banks pay to borrow money from the Federal Reserve
  • Reducing the discount rate –

encourages people to borrow money ->

increases money supply & helps economy

grow **used during recession**

- period of contraction

slide10

Increasingdiscount rate – discourages borrowing -> decreases money supply & slows economy down

*** used during periods of inflation***

-- period of expansion & rising prices

2 required reserve ratio
2. Required Reserve Ratio
  • the fraction of deposits banks must keep on hand
  • reducing the RRR – frees up money for loans -> puts more $ in circulation – helps economy grow
  • increasing the RRR – keeps more

$ out of circulation – slows

economy down

3 open market operations
3. Open Market Operations
  • the buying and selling of government bonds

with Federal Reserve Funds

  • when the Fed buys bonds, more money is put into circulation – helps the

economy grow

  • when the Fed sells bonds, money is taken out of circulation – makes the economy slow down
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