113
Chapter 5 Federal Reserve System
Terms
monetary policy
discount rate
prime rate
reserve requirement
Section 5.3
Function of the Federal
Reserve System
Objectives
After completing this section, you will be able to:
¶ KhrssgdEdcbnqdetmbshnmr-
¶ Cd›mdlnmds‘qxonkhbx‘mcgnvsgdEdcbnmctbsrhs-
¶ CdrbqhadgnvsgdEdcqdftk‘sdr‘mcrtodquhrdrhsrldladqa‘mjr-
¶ Khrssgd›m‘mbh‘krdquhbdrsgdEdcoqnuhcdrenqhsrldladqa‘mjr‘mc
the US government.
¶ HcdmshexsgdsnnkrsgdEdctrdrsnl‘jdsgd›m‘mbh‘krxrsdlrs‘akd-
Core Functions
SgdEdcetmbshnmr‘kknva‘mjr+atrhmdrrdr+‘mchmchuhct‘krsn
conduct business. Buying, selling, saving, and spending are all affected
by the Fed. The Federal Reserve System has four primary functions:
¶ drs‘akhrghmfsgdm‘shnmlnmds‘qxonkhbx+vghbg‘eedbsrsgdlnmds‘qx
and credit conditions in the economy
¶ rtodquhrhmf‘mcqdftk‘shmfa‘mjhmfhmrshstshnmr
¶ oqnuhchmf›m‘mbh‘krdquhbdrsncdonrhsnqxhmrshstshnmr+sgdTR
fnudqmldms+‘mcenqdhfmne›bh‘khmrshstshnmr+hmbktchmfnodq‘shmfsgd
m‘shnmo‘xldmsrrxrsdl
¶ l‘hms‘hmhmfsgdrs‘ahkhsxnesgd›m‘mbh‘krxrsdl
Monetary Policy
Cduhrhmf‘mcb‘qqxhmfntslnmds‘qxonkhbxhrmns‘md‘rxs‘rj--j
Monetary policyhrsgdqdftk‘shnmne‘bntmsqxlnmdxrtookx
to achieve economic goals and stability. The Fed uses tools to
control the interest rate charged for loans and the amount of
reserves banks must maintain. If banks are instructed to maintain
higher reserves, the interest rate borrowers must pay drops.
Sghrb‘trdrsgddbnmnlxsnfqnv-Enqdw‘lokd+xntl‘xmddc
a loan to buy a new car. It is more attractive to buy a car when
the interest rate is 2% than if the interest rate is 5%. This is
because your monthly payments and the interest you pay
would be less at 2% than 5%.
n
Rntqbd9Rgtssdqrsnbj’Itqh‘gLnrhm(
I nte rest rates, wh ich affect th e
tota l p rice y o u pa y o n a ca r l oa n ,
a re reg u l ated by th e Fed e ra l
Rese rve S yste m .