Chapter 16

The Federal Reserve

System

What is this Thing???

Why

do I have to learn about the Federal

Reserve System AKA The Fed?
It tries to regulate and continually

improve the economy

The Fed is an independent agency whose
members are appointed
The

Chairman of the Federal Reserve is

Janet Yellen.
Previous 2 Chairs: Ben Bernanke and Alan

Greenspan

Fighting for the Right

Reasons
What

are the TWO main things that

the Fed fights?
A. Unemployment
B. Inflation

How is the Fed

Organized?
The

Federal Reserve System is organized

with
7 members on Board of Governors
12 District Reserve

Banks
Federal

Open Market
Committee (FOMC)

Makes decisions

about interest rates

and the growth of the
U.S. money supply

The 7 Functions of the

Fed
1. Control the money supply
Using GDP, they try to maintain a

stable money supply

Ex. What would happen if $500 million dollars were to
be added to the American economy? Would the value
of the dollar change?
YES- Inflation would occur

2. Supply the economy with paper money

Reminder:

What is the official term for paper

money?
Federal Reserve Note

The 7 Functions of the

Fed
3. Clears checks

The 7 Functions of the

Fed
4. Holds bank reserves
Each bank in the U.S. keeps a RESERVE

ACCOUNT at the Federal Reserve bank in

their region, which can be used for
emergency borrowing.
The Fed is sometimes called the Bankers
Bank

5. Supervises banks
To insure that banks are a safe place

for you to have your money.

The 7 Functions of the

Fed
6. Lender of last resort
A run occurs if something scares everyone

into wanting their cash from the bank.

What would happen if banks did not have enough?
You would lose all of your money

Has this ever happened before?

Yes The Great Depression

7. Banker of the U.S government

Cashes checks for the U.S. government
U.S. Treasury has a checking account with

the Fed

On a Side Note
The

Federal Deposit Insurance

Corporation (FDIC) was created in
1933
Provides bank deposit insurance

Guarantees the safety of deposits in

member banks up to $250,000 per
depositor per bank.

How does that Work???

How does the Fed accomplish these
functions?
1. Change the Reserve Requirement
The amount banks are required to

keep at the Fed

More money in reserve = Shrink money
supply
Less money in reserve = Expand money
supply

How does that Work???

2. Open market Operations
Buying/Selling of government

securities- (Treasury bonds, etc.)

Issue more bonds = Shrink money
supply
Collect bonds = Expand money supply

3. Change the discount rate

The interest rate the Fed charges

banks for loans

What are the Results???

Discount Rates
are too High
People get fewer
loans
Businesses stop
expanding
Unemployment
increases
Inflation decreases

Discount Rates
are too Low
People get more loans
Businesses expand
Unemployment
decreases
Inflation increases

Adjusting the Plan

The

Fed tries to keep the business

cycle as stable as possible

Adjusting the Plan

If

the economy is experiencing a

contraction, the Fed will follow an easy
money policy in order to increase
the money supply.

Vs.
If

the economy is experiencing a rapid

expansion that may cause inflation, the
Fed will introduce a tight money
policy to reduce the money supply.

Adjusting the Plan

If

a stabilization policy is not timed

properly, it can make the business
cycle worse.

Heres the Plan

Any

policy made by the Federal

Reserve to improve the economy is
called monetary policy.
Ex. Changing the money supply

Any

policy made by the U.S.

government to improve the economy
is called fiscal policy.
Ex. Taxes, government regulation, etc.