chapter 16 economics

1. Explain the reasoning behind the creation of the Federal Reserve.

1. The Federal Reserve System is the central bank for the United States. Congress created the Federal Reserve in 1913 to provide stability for the U.S. financial system after the country experienced a series of severe financial crises. The Federal Reserve's role in the economy includes conducting monetary policy, maintaining the stability of the financial system, supervising and regulating financial institutions, fostering a safe and efficient payments system, and promoting consumer protection and community development.

10. Explain the tight money policy.

10. The "tight money policy" is the monetary policy that decreases the money supply by increasing interest rate, making money more expensive to borrow, and discourages people and business from borrowing money to buy goods and services. It is also a method used to decrease inflation.

2. Identify and explain the parts or components of the Federal Reserve System.

2. The Federal Reserve System is unique among the world's central banks for its decentralized structure and its public/private nature. In the Federal Reserve Act of 1913, Congress called for a decentralized structure with a maximum of 12 district banks located throughout the country. The district banks are the private part of the system and the Board of Governors is the public part. District banks operate under the direction of a private board representing banking, business and community organizations throughout the district. A selection committee of non-banker board members select the president of the district banks. The president and his or her professional staff are employees of the district and run the day-to-day operations of the district banks. The President of the United States nominates members of the Board of Governors and the U.S. Senate confirms them. They are the public part of the system. The Federal Open Market Committee (FOMC) is the monetary policy making body of the Federal Reserve System. When fully staffed, the FOMC includes the seven members of the Board of Governors and the 12 district bank presidents. Only five of the twelve district bank presidents are voting members of the FOMC at any one time. The New York District president always votes. The other four voting spots rotate among the remaining eleven district presidents. The FOMC makes key decisions about interest rates and the growth of the money supply and the buying and selling of government securities. The Federal Advisory Committee or the FAC collects economic data for the board of governors. The Fed is headed by the Chairman of the Federal Reserve. The chairman acts as the main spokesperson for monetary policy. All nationally chartered banks are members of the Fed. All banks can use the services of the Fed as of 1980.

3. Identify and explain how the Federal Reserve serves the federal government.

3. The Fed serves the government as the government's banker and is responsible for implementing monetary policy, acts as the financial agent for the buying and selling of government securities (T-bills, bonds and notes), and issues currency through the U.S Department of the Treasury and coins through the U.S. Mint for the government.

4. Identify and explain how the Federal Reserve serves banks and regulates the banking industry.

4. The Fed serves banks by supervising lending practices, clears checks, and is the lender of last resort for banks. The Fed regulates the banking industry by conducting bank examinations to make sure banks are following the laws and regulations. The Fed also tracks the reserve requirement (fractional reserve system) or how much money is on hand in reserve in each of the banks.

5. Define monetary policy.

5. According to the Federal Reserve's 2016 edition of Purposes and Functions, "monetary policy is the Federal Reserve's actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States." Monetary policy refers to the actions the Fed takes to influence the amount or supply of money, cost and availability of credit, the level of real GDP and the rate of inflation in the economy.

6. Identify and explain the four monetary policy tools (reserve requirement, discount rate, open market operations and interest on reserves).

6. Monetary policy tools include the reserve requirement, the amount of money on hand in the bank; discount rate or the amount of interest charged on loans to banks that borrow from the Fed; open market operations involves the buying and selling of government securities; interest on reserves, the interest the Fed pays to banks on the reserves held by a bank. All four tools are used by the Fed to increase or decrease the money supply. See chart on page 68 in Teacher notes.

7. Explain the difference between the prime rate, federal funds rate and the discount rate.

7. The prime rate is the interest rate banks charge on short term loans to their best customers. Changes in the discount rate are reflected in the prime rate. The federal funds rate is the rate of interest banks charge each other for loans. The discount rate is the rate of interest the Federal Reserve charges for loans to commercial banks.

8. Explain the relationship between the money supply and interest rates.

8. The higher the interest rate, the more it costs to borrow money and less money will be used. Lower interest rates make the cost of borrowing cheaper and the use of money will increase.

9. Explain the easy money policy.

9. The "easy money policy" is the monetary policy that increases the money supply by lowering interest rates, making money cheaper to borrow, and encourages people and businesses to borrow money to buy goods and services.