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The Federal Reserve “The Fed” The Fed • • The Federal Reserve is our nation’s bank Their customers are: 1. The Government 2. Banks – Wells Fargo, Bank of America History • Federal Reserve Act of 1913 – Set up the Federal Reserve – 12 independent regional banks – Did not work because they were too independent • Restructured in 1935 as The Fed today • Centralized banks: Banks work together Structure of the Fed • Board of Directors – Chairman is Ben Bernanke • In D.C. • 14 year terms (appointed by the Pres.) Structure cont. 12 District Banks -monitor and report about its members banks Members Banks -nationally chartered banks must join The Fed - FDIC Functions of the Fed • Serve Government – Federal Governments bankers – Sell bonds – Issue currency Functions • Serve Banks – Clear checks – Supervise lending – Lender of last resort ( lend banks $$$) Functions • Regulate Banks – Control the money supply – Bank examinations Functions • Regulate the money supply – Stabilize the economy – Lessen the negative effects of the business cycles – Control inflation/keep purchasing power strong 3 Monetary tools to expand/contract our economy • Required reserve ratio (RRR) – Amount that banks must keep from each deposit An increase in the RRR will cause a decrease in the money supply(contract) 3 Monetary tools to expand/contract our economy • Discount Rate – Interest rate The Fed charges banks to borrow money An increase in the discount rate will decrease the money supply (contract) 3 Monetary tools to expand/contract our economy • Open Market Operations – Buying and selling of govt. securities to alter the supply of money Buying will result in an increase in the money supply (expand). Fiscal Policy to help expand/contract our economy • Fiscal Policy – Controlled by the President and Congress by taxing and spending (budgets) • Expand the economy by decreasing taxes and increasing government spending • Contract the economy by increasing taxes and decreasing government spending • What is the purpose if the Govt imposes a significant tax on alcohol? – Decrease the supply of alcohol (tax incentive)