Federal Reserve System

Federal Reserve System

Define:  Federal Reserve System (FED), monetary base, discount rate, and federal funds rate

List and define six functions of the Federal Reserve System

The primary function of the FED is controlling money supply (called monetary policy).  Money supply is directly tied to economic activity.  If the economy is under performing, the FED will increase money supply in order to increase economic activity.  If the economy is over performing, and as a result experiencing inflation, the FED will reduce the money supply, thereby reducing economic activity.  The FED uses three tools to control money supply (increasing or decreasing it).  They are open market operations, reserve requirements, and discount rate.  Explain how each can be used to either increase or decrease money supply