Chapter 15, Problem 10AA

To determine

To explain: The main functions of the Federal Reserve.

Explanation of Solution

The main functions of the Federal Reserve are as follows:

1. Check clearing: Fed performs check clearing by which a check deposited in one institution is transferred to the depository institution of the issuer.

2. Acting as fiscal agent: The Federal Reserve works as a fiscal agent who manages the deposits of tax revenues and holds checking account for the Federal government.

3. Supervisor of banks: Federal Reserve is the banks of banks. It is considered as head banks which has branches in all 12 federal districts. It is an advisor of the Federal Government which regulates the banks that are members of the Federal Reserve System.

4. Holding the reserves: Federal Reserve manages the reserve requirements of banks by providing banks only a certain amount from the deposits for lending and keeping the remaining as reserves.

5. Supply of paper currency: It is the Federal Reserve which supplies the paper currency in the economy. Fed ensures that the supply of paper money is maintained in the economy.

6. Regulating the money supply: It is the primary responsibility of Fed to regulate the supply of money in the economy. To regulate the money supply in the economy Fed applies various monetary and fiscal policies.

Economics Concept Introduction

Introduction:

Federal Reserve-The Federal Reserve was formed in the year 1913 by Congress to act as the central banking organization of nation. It is a system or network of banks. The Federal Reserve or Fed is the body responsible for forming the monetary policies in the United States.