Lesson 6.3 The Federal Reserve System

What two problems was Congress trying to solve in creating the Federal Reserve System?

- Unemployment - Inflation in recession

What kind of information do you think a member bank would need to provide to a District Bank examiner?

- investments - loans - any excessive risks that the bank underwent

State three features of the structure and composition of the Federal Reserve System that contribute to its independence from the government.

- the member - district - central banks

Use the diagram below to identify key events in the history of the Federal Reserve System.

1913 - Congress passed the Federal Reserve Act 1935 - Congress adjusted the Federal Reserve's structure to better respond more effectively to future crises. Early 1950s - The Fed had a sharp disagreement with President Harry Truman over who would control interest rates on Treasury bonds 1980 - A new law gave the Fed the authority to set reserve requirements for all banks, even those that are not members 1987 - The Fed try to reassure investors that it would support financial instructions in times of crises 2008 - The Fed played a leading role in responding to the financial crisis that arose

The Lesson says that each bank must report its reserves everyday to the Fed, allowing it to monitor the money supply. What other purpose does this reporting serve?

Another purpose to this reporting is to ensure financial stability among the banks.

Review the history of the First and Second Banks of the United States in the reading. What can you conclude about the effectiveness of the two banks?

As banks, they were bad because they confused everyone concerning every aspect of their systems. As a learning experience, they were vey effective because they showed the US the things that needed to be addressed to make the systems better.

What does the phrase "lender of last resort" mean?

Financial institutions or individuals that provide credit and/or liquidity to other financial institutions and/or individuals who have exhausted their remaining alternatives for credit or liquidity.

How do higher interest rates affect people's decisions to save or spend their money?

High interest rates make it harder for most to afford goods, so they save up money or spend it on something else.

Why do banks become members of the Federal Reserve System?

If a bank joins the Federal Reserve System, then they are able to get money from them if the bank is low and they money supply is regulated.

Review the explanation of banking reserves in the Lesson. How does a bank benefit from having low reserves? What risks does it run if it has low reserves?

If there are low reserves, they they could risk no having enough money and would in turn cause a panic.

What is the key function of the Federal Open Market Committee (FOMC)?

The Federal Reserve Committee makes key decisions about interest rates and the growth of the United States money supply.

What unusual steps did the Fed take in 2008 financial crisis? What can you conclude about the financial crisis, compared to earlier difficult economic times, from these actions?

The Federal Reserve System didn't help out the struggling banks after the bad loans that dealt out.

Which part of the Federal Reserve System regulates the money supply?

The Treasury and the Federal Reserve System work together in the economy to regulate the money supply carefully.

Where do income tax payments that the Treasury receives go?

The Treasury sends the money from income taxes to different insurances and branches.

What do central banks do?

The central bank manages the currency, money supply, and the interest rates in an economy.

Read the passage from the Federal Reserve Board, about the situation in the small Minnesota town in the 1930s. What is the author's purpose in writing this passage?

The purpose in writing this passage was to show the extent to issues the Fed would deal with

What is the relationship between the Fed and the Treasury?

They work together to get money from the government.