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A quick look at the purpose of "The Fed" and how it does what it does.

Tim Vanlaningham

on 30 October 2015

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What it is:
What it does:
How it does Monetary Policy:
The Federal Reserve System:
The central bank of the United States.
It's like a bank's bank with some other fancy jobs to do.
You put money in your bank.
Your bank puts money in the Fed.
Works closely with the government to keep the economy stable & healthy
It's run by the "Board of Governors."
A group of 7 people
Each serves 14 years
Chosen by the US President
A single "Chairman" leads the group (4 years)
Current chairwoman is Janet Yellen
It's spread out across the country.
Its headquarters are in Washington DC.
Where Yellen & the Board of Governors hang out.
Each of the 12 branches manages things in its district.
Created in 1913
3rd Central Bank in US history
Uses "Monetary Policy" to control our money, supervise banks, maintain the stability of the financial system and provide special financial services to banks and the U.S. government.
...The Federal Reserve Bank of Chicago
1) Monetary Policy
Maintaining a healthy economy
More on that later...
4 Functions:
2) Supervising & Regulating US Banks
Make sure banks are behaving themselves
3) Provide Special Financial Services
Hold bank reserves @ the Fed
Release paper currency into the economy
4) Give Emergency Financial Support
Lender of last resort
Respond to & repair financial catastrophes
Monetary Policy:
The Fed's attempts to encourage a healthy economy
(promote employment, control inflation, etc.)
Completely based on making it easier or harder for banks, businesses, & citizens to get money
Also known as...
Three "Tools" of Monetary Policy
#1: Open-Market Operations
#3: Change the Reserve Requirement
#2: Change the Discount Rate
1) The Fed sells bonds to banks (takes their $)
2) Banks have less money; fewer loans to citizens
3) Less money in the economy!
...Just Buying & selling government bonds
1) The Fed buys bonds from banks (pays w/ $)
2) Banks have more money; more loans to citizens
3) More money in the economy!
Open-Market Sale
Open-Market Purchase
GDP contracts
Inflation falls
Unemployment rises
GDP expands
Inflation rises
Unemployment falls
Banks are required to keep a certain amount of money in their vaults (and they lend out the rest)
The Fed can force banks to keep more or less in reserve
Reserve Requirement
1) Banks must hold back less money
2) More can be loaned out; more loans to citizens
3) More money in the economy!
Reserve Requirement
1) Banks must hold back more money
2) Less can be loaned out; fewer loans to citizens
3) Less money in the economy!
#3: Changing the Reserve Requirement
#2: Changing the Discount Rate

If the D.R. is higher:
1) Banks will borrow more money from the Fed
2) More can be loaned out from banks to citizens
3) More money in the economy!
Discount Rate:
The interest rate the Fed charges banks for loans
If the D.R. is lower:
1) Banks will borrow less money from the Fed
2) Less can be loaned out from banks to citizens
3) Less money in the economy!
(The most common one)
If everything works perfectly, the economy will have high employment, low inflation, and strong banks & businesses!
(textbook definition...)
2008 financial meltdown...
NOT "fiscal" policy!
...but it's harder than it seems!
Part 1
Part 2
Part 3
Former chairman was Ben Bernanke
Attempt #1:
First Bank of the United States
Created by Alexander Hamilton in 1791
To improve USA's credit & handling of gov. finances
Ended in 1811 after bank’s charter expired (little support for bank, Thomas Jefferson believed it held too much power over economy).
Attempt #2:
Second Bank of the United States
Created by James Madison in 1816
To stop high inflation after gov. printed money to pay for the War of 1812
Ended in 1836 by Andrew Jackson; he saw it as corrupt.
Pre-Attempt #3 (1837 – 1913):
“Free Banking” Era--No Central Bank
Booms and Panics
Minor government involvement (created uniform national currency)
Full transcript