Functions of the FedFunctions of the FedChapter 12 Presentation 2

What is the (Fed)Federal What is the (Fed)Federal Reserve?Reserve?The Central Bank of AmericaControls the American Money

Supply7 members of the Board of

Governors (14 year terms with a new term every two years)

Chairman (Ben Bernanke) and Vice Chairman are appointed by the President and approved by the Senate

Central BankCentral Bank12 banks coordinated by the

Board of GovernorsCame as a result of the Federal

Reserve Act of 1913Other Ex- Britain’s Bank of

England and the Bank of Japan

What Backs Money?What Backs Money?The value of money in the US is

really backed by nothing tangibleGovernment stabilizes the value

of money

Value of MoneyValue of Money• 1. Acceptability- we are confident

that others will accept money for goods/services and resources

• 2. Legal Tender- deemed legal tender by the government (govt and private firms can specify money order or check)

• 3. Relative Scarcity- supply and demand

• *the supply of $$ determines purchasing power

Federal Reserve DistrictsFederal Reserve Districts

Routing Numbers and Routing Numbers and CashCash

Quasi-Public BanksQuasi-Public BanksBlend of private and public

ownershipEach Federal Reserve Bank is

owned by the private commercial banks in the district

Board of Governors (a government body) controls the Fed’s policies

Banker’s BankBanker’s BankProvide the same service to

banks as regular banks provide to the public

Accept deposits and make loans to banks

Typically $150 million a day in loans

***On September 11, 2001 the Fed loaned out $45 B!!!

FOMCFOMCFederal Open Market CommitteeMeets regularly in D.C. to direct

the sale and purchase of securities on the open market (ex- bonds- this controls how much money is in supply)

Buy bonds---- increase the $ supplySell bonds----decrease the $ supply

Functions of the FedFunctions of the Fed1. Issuing Currency- paper money

in circulation2. Setting reserve requirements

and holding reserves3. Lending money to banks and

thrifts- at discount rate (interest rate the Fed charges)

Fed FunctionsFed Functions4. Providing for check collecting5. Acting as a fiscal agent-spends

large sums, buys/sells bonds6. Supervising Banks- uncover

fraud7. Controlling the money supply

Life of Money in the USLife of Money in the USDenomination Life

Expectancy (Years) of Bill

$1 1.8 $5 1.3 $10 1.5 $20 2 $50 4.6 $100 7.4