Economics: Today and Tomorrow © 2008Chapter 15:
The Federal Reserve System and Monetary PolicyChapter OverviewsSection 1: Organization and Functions of the Fed
Congress created the Federal Reserve System in 1913 as the central banking organization in the United States. The Federal Reserve System, or Fed, as it is called, is made up of a Board of Governors assisted by the Federal Advisory Council, the Federal Open Market Committee, 12 Federal Reserve district banks, 25 branch banks, and many thousand banks and thrift institutions. The Fed is responsible for monetary policy in the United States. Monetary policy involves changing the rate of growth of the supply of money in circulation in order to affect the amount of credit, thereby affecting business activity in the economy. Section 2: Money Supply and the Economy
The Fed's most important function involves control over the rate of growth of the money supply and, consequently, changes in interest rates. The chapter explains how the Fed uses monetary policy to affect the rate of growth of the money supply and how loose money and tight money policies affect the cost and availability of credit. Also, the chapter explores the idea of money expansion in the banking system and describes fractional reserve banking, the basis of the United States' banking system. Section 3: Regulating the Money Supply
The Fed uses several methods to regulate the money supply—changing the reserve requirement, changing the discount rate, and open-market operations. Each of these methods is explored, and the difficulties of monetary policy are determined.  | 
