Chapter 16 Section 2

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Chapter 16 Section 2 Powered By Docstoc
					Chapter 16 Section 2

Functions of the Federal Reserve
  Functions of the Federal Reserve
 Lending Money
  Banks often lend to each other on short-term basis
  In natural disaster, all banks in region lack cash
    Fed lends to banks with enough assets and capital to
  Small banks with seasonal cash flow needs may
   borrow from Fed
  Fed serves as lender of last resort to prevent
   banking crisis
Functions of the Federal Reserve
 Regulating and Supervising Banks
   Fed banks supervise state-chartered members,
   bank holding companies
    bank holding company owns, has controlling
     interest in several banks
   Fed banks enforce truth-in-lending laws
   Conduct bank exams—audit financial practices
    of banks in district
   Monitor bank mergers to ensure competition
Serving the Federal Government
  Fed serves as federal government’s banker
    helps carry out taxation and spending activities
Serving the Federal Government
 Service 1: Paying Government Bills
   Tax revenues are deposited with the Fed
   Fed issues checks, makes electronic payments
   via U.S. Treasury
    for transfer payments, employee wages, direct
     spending, tax refunds
    deducts amounts from government’s account
   Processes postal money orders, food stamps
Serving the Federal Government
 Service 2: Selling Government Securities
   Fed processes U.S. savings bonds, auctions
   other securities
    provides information, collects payment, credits
     funds, delivers bonds
   Pays interest on bonds
   Federal Open Market Committee (FOMC)
   supervises sales of securities
    purpose is to stabilize the economy
  Serving the Federal Government
 Service 3: Distributing Currency
   Federal Reserve notes are official paper currency
    of U.S.: fiat money
   Treasury Department prints notes that go to Fed
    district banks
   Fed banks distribute notes to depository
    institutions in amounts needed
    currency then goes to people and businesses
   Fed also distributes coins produced by U.S. Mint
Creating Money
  Creating money—how money enters circulation
  through deposits, loans
   Fed establishes required reserve ratio (RRR) for banks
     fraction of bank’s deposits that it must keep in reserve
   Reserve may be stored as cash in bank’s vault or
    deposited with Fed
Creating Money
 Example: Money Creation
  Banking system creates money whenever banks
   get deposit and make loan
  Level of the RRR determines how much money
   may be loaned
  Money supply increases by total loans made
   after initial cash deposit
    deposit multiplier formula tells how much money
    supply will increase
 Why might the Fed help a small bank in an agricultural
  region stabilize its cash flow?
 How are the banking services the fed provides to the
  government similar to the services it provides to banks?
 If the Fed raised the RRR from 10% to 12%, how would it
  affect the money supply?
 You have been planning your college finances and you know
  that you’ll have to take a bank loan to cover tuition costs.You
  read that the Fed intends to raise the RRR rate from 10% to
  20%. How will this change affect the money supply and your
  ability to borrow money for college tuition?

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