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Created with Fabric.js 1.4.5 The Federal Reserve System Purpose The Federal Reserve was created inresponse to the banking panic of 1907.After seeing the madness of the peopletrying to rush to their money before itall disappeared, Congress decided toact. It conceptualized and created the Federal Reserve System. The purposeof this system is to conduct the country'smonetary policy, supervise and regulatebanks, promote financial stability, and act as the Government's fiscal agent. To accomplish this, the Federal Reserve System has three parts The Reserve Banks The Board of Governors The Federal Open Market Committee The Reserve Banks act as the banks'bank. This is because they often lendmoney to banks so they can meet reserve requirements and have enoughmoney to give out loans. They also distribute currency and coin to banksfrom the mint. These banks are the mostFederal Government independent part of the system. They always consider local economic changes and pass themup the ladder to leaders of the system.Furthermore, they regulate and checkbanks that are in their region (there are12 regions). They make sure that the banks' books check out and thattheir lending practices comply withtheir own values as well as State andFederal laws. Finally, depending on a rotation, the Reserve Banks help preparetheir president for participation on the FOMC. They make sure the presidenthas all the necessary info before going.The FOMC will be discusses later. The Board of Governors acts as thesystem's supervising body. The Board is made up of seven memberswhose terms are 14 years and a newmember is elected every two years. This helps promote non-partisanshipwithin the Board and prevents onePresident from having too much power. The seven members of the board checkon the Reserve Banksto make sure that they are doing their job. They also are at the forefront of the Government'smonetary policymaking. Firstly, theBoard issues banking and creditregulations that the Reserve banksthen enforce. These regulations play an important role in how consumercredit functions. Secondly, all sevenmembers of the Board participate inFOMC meetings. That means they haveconsiderable influence on the decisions made there. The FOMC is discussed next. The FOMC is the Government's main makerof monetary policy. It consists of the Board of Governors and five Reserve Bank presidentsthat change on a rotational basis except for theNew York Reserve bank president who is a permanent member. The FOMC's job is to createthe nation's monetary policy in regard to two goals. Goal one is price stability. The target rate for inflationis 2% each year. Goal two is maximum employment.This means that the most people from the workforceas possible are working. To accomplish these goals,the FOMC uses what are called Open Market Operations. This is the buying or selling of Government securities to contract or expand the money supply in the economy. This translates tothe rise or fall in banks' interest rates which either slows down or speeds up economic growth. Other things that the FOMC can do are change the discountrate or change the reserve requirement. Raising thediscount rate or reserve requirement are contractionary actions because they decrease money supply and driveup interest rates. But, it is a good tool to curb inflation. Theopposite would be expansionary and would promote growth.
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