Economics: Today and Tomorrow © 2012

Introduction
Students have learned about the functions and structure of the Federal Reserve System. In this exercise, students will explore the structure and responsibilities of the Fed to understand how it works to maintain a safe and sound banking system.

Lesson Description
Students will use information from the Federal Reserve Bank of Chicago Web site to learn about the responsibilities and structure of the Fed. Students will read about how the Fed serves as a bank for financial institutions, serves as the U.S. fiscal agent, supervises and regulates bank holding companies and state member banks, and works as the nation's money manager. They will also learn how the Fed's system of "checks and balances" ensure that monetary policy is based on broad participation. Students will then answer four questions and apply this information by writing a news story depicting what would happen to the U.S. economy if the Fed were terminated.

Previous Knowledge Expected
Fed: the Federal Reserve System created by Congress in 1913 as the nation's central banking organization
monetary policy: policy that involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit

Applied Content Standards (from the Council for Economic Education)Standard 20: Federal government budgetary policy and the Federal Reserve System's monetary policy influence the overall levels of employment, output, and prices.

1. Students will be able to identify the functions of the Federal Reserve and how its structure provides for security in U.S. banking and monetary policy.
2. Students will be able to use this knowledge to write a newspaper article detailing what would happen to the money supply, the economy, and/or security in banking if the Federal Reserve no longer existed.

1. The Federal Reserve works to keep prices stable by influencing short-term interest rates through open-market operations, changing the discount rate, and changing the reserve requirement. Using these tools, the Fed can affect the flow of money and credit, and in turn, affect the price that consumers pay for goods. The Fed also gathers information from its regional banks and presents it to the Federal Open Market Committee. The FOMC uses this research to formulate national monetary policy in the interest of keeping inflation down.
2. The Federal Reserve's 12 regional banks are each independently incorporated with a 9-member board of directors from the private sector. This regional influence makes the central bank responsive to local needs. The Fed operates on its own earnings by charging fees for its services and competing in the marketplace with other corporations providing the same services. Even though the Fed is part of the federal government, it operates independently and is separate from the Treasury.
3. The Federal Reserve is structured in such a way that the authority of each of its policy tools is placed in a different division of the Fed. The Board of Governors, for example, sets reserve requirements. The boards of directors of the individual Reserve Banks initiate changes to the discount rate, subject to the approval of the Federal Reserve Board of Governors. Also, the Federal Open Market Committee brings together the Federal Reserve Board and banks to perform open-market operations. With the Board of Governors' terms being long and staggered, presidential influence upon Governors' decisions is limited. Decisions regarding monetary policy are based on broad participation from many different people within the Federal Reserve System. Additionally, while the Federal Reserve is the central bank of the United States, its system of regional Reserve Banks allows it to reflect local concerns.
4. The Federal Reserve supervises and regulates financial institutions, making sure their practices are safe and fair. In the consumers' interest, they rule on bank mergers and purchases. The Fed is also responsible for implementing such consumer-oriented laws as Truth-in-Lending, Equal Credit Opportunity, and Home Mortgage Disclosure. As the "lender of last resort," the Federal Reserve Bank helps prevent financial difficulties from spreading from one institution to another. The bank that finds itself low on deposits with nowhere to borrow can borrow from the Fed. All these facets of the Federal Reserve help to maintain safe and sound banking practices.
5. Students' newspaper articles will vary.