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The Federal Reserve

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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The Federal Reserve

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  1. The Federal Reserve

  2. 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

  3. How is the Fed structured? • overseen by 7-member Board of Governors • 12 districts – 1 Federal Reserve bank per district

  4. Member banks – all nationally chartered banks must join the Federal Reserve system -- contribute funds & receive stocks & dividends from the system -- Federal Reserve System is owned by banks, not government

  5. What is the FOMC? • 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

  6. check clearing - process by which banks record whose account gives up $ and whose account receives $ -- mostly done electronically now

  7. What is Monetary Policy? • 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

  8. 1. Discount Rate • 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

  9. Increasingdiscount rate – discourages borrowing -> decreases money supply & slows economy down *** used during periods of inflation*** -- period of expansion & rising prices

  10. 2. Required Reserve Ratio • 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

  11. 3. Open Market Operations • 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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