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1. Splash Screen

2. Chapter Introduction Section 1:Organization and Functions of the Fed Section 2:Money Supply and the Economy Section 3:Regulating the Money Supply Visual Summary Chapter Menu

3. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth. Chapter Intro 1

4. In this chapter, read to learn about who is in charge of the U.S. money supply and how they decide how much currency to put into circulation. Chapter Intro 2

5. Chapter Preview-End

6. Section Preview In this section, you will learn about how the Federal Reserve System, or Fed, is organized, and its role in determining the nation’s monetary policy. Section 1-Main Idea

7. Organization of the Federal Reserve System The Federal Open Market Committee of the Federal Reserve is responsible for implementing monetary policy. Section 1

8. Organization of the Federal Reserve System (cont.) • The Federal Reserve System, or Fed, is a system, or network, of banks that share power. • The Fed is responsible for monetary policy in the United States. View:Organization of the Fed Section 1

9. Organization of the Federal Reserve System (cont.) • The Board of Governors, consisting of 7 full-time members appointed by the president, directs the operation of the Fed. • They are assisted by the Federal Advisory Council (FAC)—12 members elected by the directors of each Federal Reserve district bank. Section 1

10. Organization of the Federal Reserve System (cont.) • TheFederal Open Market Committee (FOMC) has 12-voting members that meet 8 times a year to decide the course of action that the Fed should take to control the money supply. • The nation is divided into 12 Federal Reserve districts, with each district having a Fed district bank. View:The Federal Reserve System Section 1

11. Organization of the Federal Reserve System (cont.) • Each district bank is set up as a corporation owned by its member banks. • The system also includes 25 Federal Reserve branch banks. • All national banks are required to become members of the Federal Reserve System. Section 1

12. Functions of the Fed The primary function of the Federal Reserve is to control the money supply. Section 1

13. Functions of the Fed (cont.) • Functions of the Federal Reserve: • Check clearing • Acting as the federal government’s fiscal agent • Supervising banks • Holding reserves and setting reserve requirements View:How a Check Clears Section 1

14. Functions of the Fed (cont.) • Supplying paper currency • Regulating the money supply • Sets standards for certain types of consumer legislation View:Functions of the Fed Section 1

15. Section 1-End

16. Section Preview In this section, you will learn how the Fed controls the money supply and interest rates. Section 2-Main Idea

17. Content Vocabulary • loose money policy • tight money policy • fractional reserve banking • reserve requirements Section 2-Key Terms

18. Academic Vocabulary • function • portion Section 2-Objectives

19. Loose and Tight Money Policies The goal of monetary policy is to promote economic growth and employment without causing inflation. Section 2

20. Loose and Tight Money Policies (cont.) • Credit, like any good or service, has a cost—the interest that is paid to obtain it. • If the Fed implements a loose money policy (often called expansionary) credit is abundant and inexpensive to obtain, possibly leading to inflation. View:Balancing Monetary Policy Section 2

21. Loose and Tight Money Policies (cont.) • If the Fed implements a tight money policy (also called “contractionary”), credit is in short supply and is expensive to obtain, which slows the economy. Section 2

22. A B If more people are employed, borrowing is easy, and people spend more, which type of policy is in effect? A.Loose B.Tight Section 2

23. Fractional Reserve Banking Banks are not required to keep 100 percent reserves to back their deposits. Section 2

24. Fractional Reserve Banking (cont.) • The banking system is based on fractional reserve banking. • Many banks have reserve requirements. • A larger portion of the money supply consists of funds that the Feds and customers deposit in banks. • Banks may only keep 10% of the deposits in reserve, so they use the remaining 90% in reserves to create new money. Section 2

25. Fractional Reserve Banking (cont.) • When each bank uses the non-required reserve portion of money deposits to make loans to businesses and individuals, the process is known as the multiple expansion of the money supply. View:Expanding the Money Supply Section 2

26. Section 2-End

27. Section Preview In this section, you will learn about several tools that the Fed uses to control the size of the U.S. money supply Section 3-Main Idea

28. A B C Do you feel that the actions of the Fed impact your daily life? A.Yes B.Somewhat C.Not at all Section 3-Polling Question

29. Changing Reserve Requirements The Fed can change the growth rate of the money supply by changing reserve requirements on bank deposits. Section 3

30. Changing Reserve Requirements (cont.) • The Federal Reserve can choose to control the money supply by changing the reserve requirements of financial institutions. • If the Fed raises the reserve requirements, it would decrease the amount of money in the economy. • If the Fed lowers the reserve requirements, it would increase the amount of money in the economy. View:Raising and Lowering Reserve Requirements Section 3

31. Changing the Discount Rate The Fed can change the growth rate of the money supply by changing short-term interest rates. Section 3

32. Changing the Discount Rate (cont.) • If a bank does not have enough reserves to meet its reserve requirement, it can ask the Federal Reserve district bank for a loan. • If the discount rate is high, the bank passes its increased costs on to customers in the form of higher interest rates on loans. Section 3

33. Changing the Discount Rate (cont.) • Banks might raise their prime rate. • High interest rates discourage borrowers and may keep down the growth of the money supply. • Low interest rates encourage borrowers and may lead to growth of the money supply. Section 3

34. Changing the Discount Rate (cont.) • Changing the reserve requirement or the discount rate is now rarely used by the Fed. • Rather, the Fed states periodically that it is going to change thefederal funds rate. • If the Fed causes the federal funds rate to drop, banks will borrow more and, thus, lend more—and vice versa. View:Federal Funds Rate Section 3

35. Open-Market Operations The Fed controls the money supply primarily through the purchase and sale of government securities. Section 3

36. Open-Market Operations (cont.) • The major tool the Fed uses to control the money supply is a practice known as open-market operations. • When the Fed buys securities—such as Treasury bills, notes, and bonds—it pays for them by making a deposit in the dealer’s bank. • This increases the bank’s reserves, thus increasing the money supply. Section 3

37. Open-Market Operations (cont.) • When the Fed sells Treasury bills to a dealer, the dealer’s bank must use its deposits to purchase securities. • This decreases the bank’s reserves, thus decreasing the money supply. • Some people feel that the Fed should not engage in monetary policy due to misjudgments in the past. Section 3

38. Open-Market Operations (cont.) • The spending and taxing policies of the federal government also affect the economy. Section 3

39. Section 3-End

40. The primary function of the Federal Reserve Systemis to control the money supply, but it has other responsibilities as well. VS 1

41. The Fed can implement either a loose or tight money policyto try to promote economic growth and employment. VS 2

42. The Fed has several tools at its disposal to use to regulate the money supply. VS 3

43. VS-End

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