Economics / Unit 10: The Federal Reserve and Monetary Policy
10.2 Functions of the Federal Reserve
Notes
- Conducts monetary policy: manages the money supply and interest rates. Congress gave the Fed a dual mandate: maximum employment and stable prices (along with moderate long-term interest rates).
- Supervises and regulates banks to keep the banking system safe and sound.
- Serves banks: holds their reserves, processes payments and checks, and makes loans to banks.
- Lender of last resort: lends to banks in a crisis to prevent panics.
- Banker for the federal government: holds the U.S. Treasury's account and handles payments.
- Issues currency: dollar bills are Federal Reserve notes, printed by the Treasury's Bureau of Engraving and Printing and put into circulation by the Fed. Coins are made by the U.S. Mint.
- The Fed does not set tax rates or decide government spending; that is fiscal policy, done by Congress and the President.
Practice
The Fed's "dual mandate" refers to the goals of:
Congress directed the Fed to pursue both employment and price stability.
During a financial panic, the Fed lends money to banks that cannot borrow elsewhere. In this role it is acting as:
Emergency lending helps stop panics from spreading.
Which is NOT a function of the Federal Reserve?
Taxes are part of fiscal policy, set by Congress and the President.
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