"Functions of the Fed"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 drawing a cartoon 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 National Council on
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. Instructional
Objectives - 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.
- Students will be able to use this knowledge to draw a cartoon
illustrating what would happen to the money supply, the economy,
and/or security in banking if the Federal Reserve no longer
existed.
Student
Web Activity Answers- 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.
- 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.
- 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.
- 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.
- Students' cartoons will vary.
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