The Federal Reserve (also called the Fed) is the central bank of the United States. The Fed oversees the currency and money supply. The Fed system consists of five major parts: (1) the board of governors, (2) the Federal Open Market Committee, (3) 12 Federal Reserve banks, (4) three advisory councils, and (5) the 3,000 member banks in the system. The board of governors administers and supervises the 12 Federal Reserve banks. The 7 members of the board are appointed by the President of the United States and confirmed by the U.S. Senate. The Federal Open Market Committee has 12 voting members and is the policy-making body. The Federal Reserve is a private firm not supported by taxpayer dollars. The Fed buys and sells foreign currencies, regulates various types of credit, supervises banks, and collects data on the money supply and other economic activity. The Fed's actions directly affect everyone in terms of credit card rates, consumer prices, and student loan rates. The Fed uses three processes for controlling the money supply that impacts the economy: the reserve requirement, open-market operations, and the discount rate. The reserve requirement is a percentage of the money in commercial banks' checking and savings accounts that must be kept in the bank or in a non-interest-bearing deposit at the local Federal Reserve Bank. If a bank has $100 million in deposits and the reserve requirement is 10 percent, the bank must have $10 million on reserve. The Fed also conducts open-market operations that involve the buying and selling of government bonds. There is a finite amount of bonds available in the economy. If the Fed sells bonds, the money received for them is no longer in circulation, which decreases the money supply. The opposite occurs if the Fed is buying bonds. The money the Fed pays to buy the bonds is back in circulation, which increases the money supply. The Federal Reserve is often referred to as the "banker's bank," because member banks can borrow money from the Fed and lend it out to customers in the form of loans. The discount rate is the interest rate the Fed charges for loans to member banks. If the rate goes up, banks don't borrow, thus less money is available for loans to businesses and consumers. The Fed also acts as a clearinghouse in the banking system. The Fed clears transactions such as check cashing. The Fed sends payments back and forth among banks as the head of the Automatic Clearinghouse Network. The Fed also assumes the key role of managing the unemployment rate by keeping inflation at a level it deems acceptable. The Fed becomes extremely important during difficult economic times such as the Great Recession when unemployment accelerated and the Fed lowered the interest rate to almost zero hoping to encourage bank lending. The entire economy is affected by the actions of the Federal Reserve. A simple piece of advice is to pay attention to the Fed and follow what it is doing. THINKING IT OVER 1. Describe how the Federal Reserve can use its authority to stimulate the economy. 2. How does the Fed raising the reserve requirement affect the possibility of getting a business loan? 3. Why is monetary policy an important part of the Federal Reserve's mission?
The Federal Reserve (also called the Fed) is the central bank of the United States. The Fed oversees the currency and money supply. The Fed system consists of five major parts: (1) the board of governors, (2) the Federal Open Market Committee, (3) 12 Federal Reserve banks, (4) three advisory councils, and (5) the 3,000 member banks in the system. The board of governors administers and supervises the 12 Federal Reserve banks. The 7 members of the board are appointed by the President of the United States and confirmed by the U.S. Senate. The Federal Open Market Committee has 12 voting members and is the policy-making body. The Federal Reserve is a private firm not supported by taxpayer dollars. The Fed buys and sells foreign currencies, regulates various types of credit, supervises banks, and collects data on the money supply and other economic activity. The Fed's actions directly affect everyone in terms of credit card rates, consumer prices, and student loan rates. The Fed uses three processes for controlling the money supply that impacts the economy: the reserve requirement, open-market operations, and the discount rate. The reserve requirement is a percentage of the money in commercial banks' checking and savings accounts that must be kept in the bank or in a non-interest-bearing deposit at the local Federal Reserve Bank. If a bank has $100 million in deposits and the reserve requirement is 10 percent, the bank must have $10 million on reserve. The Fed also conducts open-market operations that involve the buying and selling of government bonds. There is a finite amount of bonds available in the economy. If the Fed sells bonds, the money received for them is no longer in circulation, which decreases the money supply. The opposite occurs if the Fed is buying bonds. The money the Fed pays to buy the bonds is back in circulation, which increases the money supply. The Federal Reserve is often referred to as the "banker's bank," because member banks can borrow money from the Fed and lend it out to customers in the form of loans. The discount rate is the interest rate the Fed charges for loans to member banks. If the rate goes up, banks don't borrow, thus less money is available for loans to businesses and consumers. The Fed also acts as a clearinghouse in the banking system. The Fed clears transactions such as check cashing. The Fed sends payments back and forth among banks as the head of the Automatic Clearinghouse Network. The Fed also assumes the key role of managing the unemployment rate by keeping inflation at a level it deems acceptable. The Fed becomes extremely important during difficult economic times such as the Great Recession when unemployment accelerated and the Fed lowered the interest rate to almost zero hoping to encourage bank lending. The entire economy is affected by the actions of the Federal Reserve. A simple piece of advice is to pay attention to the Fed and follow what it is doing. THINKING IT OVER 1. Describe how the Federal Reserve can use its authority to stimulate the economy. 2. How does the Fed raising the reserve requirement affect the possibility of getting a business loan? 3. Why is monetary policy an important part of the Federal Reserve's mission?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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