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: • List the Fed’s core functions. • Defi ne monetary policy and how the Fed conducts it. • Describe how the Fed regulates and supervises its member banks. • List the fi nancial services the Fed provides for its member banks and the US government. • Identify the tools the Fed uses to make the fi nancial system stable. Core Functions The Fed’s functions allow banks, businesses, and individuals to conduct business. Buying, selling, saving, and spending are all affected by the Fed. The Federal Reserve System has four primary functions: • establishing the nation’s monetary policy, which affects the monetary and credit conditions in the economy • supervising and regulating banking institutions • providing fi nancial services to depository institutions, the US government, and foreign offi cial institutions, including operating the nation’s payments system • maintaining the stability of the fi nancial system Monetary Policy Devising and carrying out monetary policy is not an easy task. Monetary policy is the regulation of a country’s money supply 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. This causes the economy to grow. For example, you may need 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%. k. n Source: Shutterstock (Juriah Mosin) 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 .