Economics: Today and Tomorrow © 2012Chapter 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, and 12 Federal Reserve district banks. 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 is to control the rate of growth of the money supply and, consequently, changes in interest rates. The Fed's goal is to promote economic growth and employment without causing inflation. To do this, the Fed may implement loose or tight money policy. Loose money policy makes credit inexpensive, possibly leading to inflation. Tight monetary policy makes credit more expensive and slows the economy. Also, the Fed uses a system called fractional reserve banking. Banks are required to keep only a fraction of their deposits on hand. The remainder of deposits can be lent to borrowers. Section 3: Regulating the Money Supply
The Fed uses three main tools to regulate the money supply: changing reserve requirements for banks, changing short-term interest rates such as the federal funds rate and the discount rate, and buying and selling government securities in open-market operations. No matter what tool of monetary policy the Fed uses, the effects are not felt immediately.  | 
