The Federal Reserve
Unit Overview
In this
unit, students will explain how the Federal Reserve System uses monetary tools
to regulate the nation's money supply. (CS #21)
Section A: Content Statement 21
The Federal Reserve System uses monetary
tools to regulate the nation's money supply and moderate the effects of
expansion and contraction in the economy.
Content
Elaboration
Monetary policy involves the Federal Reserve
System making decisions about the nation's money supply.
To encourage economic growth, the Federal Reserve System can:
• reduce the amount of money that banks must have on reserve
and not use to make loans;
• buy bonds; and
• take action that results in lower interest rates.
To slow economic growth, the Federal Reserve System can:
• increase the amount of money that banks must have on reserve
and not use to make loans;
• sell bonds; and
• take action that results in higher interest rates.
Let's Practice: Content
Statement 21
In 1913,
Congress
approved the Federal Reserve Act. This established 12 regional banks. Its purpose was to regulate money supply in
circulation by controlling the amount of money that banks could lend and stabilize
the nation's banking system. The Federal
Reserve is the central bank of the United
States. A Board of Governors oversees
these banks, and their goal is to curb recessions in our nation. The Federal Reserve supervises the banking
industry and makes rules that banks must follow. The Federal Reserve oversees electronic
payment systems and processes the checks people write. When banks need money, they order the
currency from the Federal Reserve. The
main job of the Federal Reserve System is to help keep the United States' economy
healthy.
The Federal
Reserve works toward three goals for a healthy economy:
1. Making sure the highest possible number of citizens have jobs
2. Keeping the price of goods and services stable
3. Making sure the cost of a loan is not too high or too low
Monetary
policy relies on the government's ability to
control the nation's money supply to promote economic growth and
stability. The money supply affects the
overall level of business activity.
In an Economic
Downturn
Action: The Federal Reserve put more money into
circulation
Result: Interest rates go down; businesses borrow more
money; consumers borrow more to spend on homes, cars, etc.
In an Economic
Upturn
Action: Federal Reserve reduces the money supply
Result: Interest rates rise; businesses borrow less;
economic growth is slowed to avoid inflation
Let's Practice: Discount Rate
