The Federal Reserve System

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The Federal Reserve System : 

The Federal Reserve System

Slide 2: 

What are the Federal Reserve’s responsibilities? 1. To regulate bank holding companies and state chartered banks. 2. To supply money and credit to the economy to maintain stable prices and full employment. 3. To ensure the smooth functioning of the payments system. 4. To act as the government’s bank.

Monetary Control : 

Monetary Control The Fed has three instruments of monetary control: Change the Discount Rate Change the Reserve Requirement Buy or sell Bonds (open market) It’s all about inflation (rise in prices) Inflation Calculator

Reserve Requirement : 

This one is easy—requirement of how much money banks are required to have in their vaults Decrease the reserve requirement (banks have to get rid of money); they lend it out and there’s more money in circulation Increase the reserve requirement (banks have get money); they collect it from their lenders and cash in investments and there’s less money in circulation This is used only in EXTREME EMERGENCIES Reserve Requirement

Discount Rate : 

Discount rate: the % rate at which the Fed loans money to other banks Discount rate is raised: costs more for a bank to get money; therefore they lend out LESS money This DECREASES the amount of money in circulation Danger: prices stay low; too much spending Discount rate is lowered: costs less for a bank to get money; therefore they lend out MORE money This INCREASES the amount of money in circulation Danger: prices rise too fast; people can’t afford Discount Rate

Buying on the Open Market : 

Fed can buy and sell bonds: a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date When the Fed SELLS bonds, money is taken out of circulation When Fed BUYS bonds, money is added to the economy Buying on the Open Market

The Regional Banks : 

The Regional Banks

Federal Reserve Money : 

Federal Reserve Money

$1000 : 

$1000

$10,000 : 

$10,000

$100,000 (Bank Transfers) : 

$100,000 (Bank Transfers)

Gold Certificate : 

Gold Certificate

Slide 13: 

Silver Certificate