The Federal Reserve System
- 4g List and explain the tools available to the Federal Reserve during financial crises (CLO 5)
- 4i Calculate the time value of money (CLO 5)
Introduction
buttons.Who decides how much banks should keep in reserve? The decision is made by the Federal Reserve System (popularly known as "the Fed"), a central banking system established in 1913. Most large banks belong to the Federal Reserve System, which divides the country into twelve districts, each with a member-owned Federal Reserve Bank. The twelve banks are coordinated by a board of governors.
The Tools of the Fed
The Fed has three major goals:
- Price stability
- Sustainable economic growth
- Full employment
Recall our definition of monetary policy as the efforts of the Federal Reserve System to regulate the nation's money supply. We also defined price stability as conditions under which the prices for products remain fairly constant. Now, we can put the two concepts together: the Fed seeks to stabilize prices by regulating the money supply and interest rates. In turn, stable prices promote economic growth and full employment - at least in theory. To conduct monetary policy, the Fed relies on three tools: reserve requirements, the discount rate, and open market operations.
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