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