The Federal Reserve System

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 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

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: 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 spendingDiscount 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

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

Federal Reserve Money

$1000

$10,000

$100,000 (Bank Transfers)

Gold Certificate

Silver Certificate