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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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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



What is the fomc
What is the FOMC? the Federal Reserve system

  • 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


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? account gives up $ and whose account receives $ -- mostly done electronically now

  • 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 account gives up $ and whose account receives $ -- mostly done electronically now

  • 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


  • Increasing account gives up $ and whose account receives $ -- mostly done electronically nowdiscount 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 account gives up $ and whose account receives $ -- mostly done electronically now

  • 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 account gives up $ and whose account receives $ -- mostly done electronically now

  • 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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