KW_Macro_Ch_13_Sec_04_The_Federal_Reserve_System

KW_Macro_Ch_13_Sec_04_The_Federal_Reserve_System - chapter...

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>> Money, Banking, and the Federal Reserve System Section 4: The Federal Reserve System chapter 13 Who’s in charge of ensuring that banks maintain enough reserves? Who decides how large the monetary base will be? The answer, in the United States, is an institution known as the Federal Reserve (or, more generally, as the “Fed”). The Fed: America’s Central Bank The Federal Reserve is a central bank —an institution that oversees and regulates the banking system, and controls the monetary base. Other central banks include the Bank of England, the Bank of Japan, and the European Central Bank, or ECB. The ECB acts as a common central bank for 12 European countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The world’s oldest central bank, by the way, is Sweden’s Sveriges Rijksbank, which awards the Nobel Prize in economics. The legal status of the Fed, which was created in 1913, is unusual: it is not exact- ly part of the U.S. government, but it is not really a private institution either. Strictly A central bank is an institution that over- sees and regulates the banking system and controls the monetary base.
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2 CHAPTER 13 SECTION 4: THE FEDERAL RESERVE SYSTEM speaking, the Federal Reserve system consists of two parts: the Board of Governors and the 12 regional Federal Reserve Banks. The Board of Governors, which oversees the system from its offices in Washington, D.C., is set up like a government agency: its seven members are appointed by the president and must be approved by the Senate. However, they are appointed for 14-year terms, to insulate them from political pressure. The chairman is appointed on a more frequent basis, every 4 years, but it’s traditional for chairmen to be reappointed and serve much longer terms. William McChesney Martin was chairman of the Fed from 1951 until 1970. Alan Greenspan, appointed in 1987, was still serving as Fed chairman in 2005. The 12 Federal Reserve Banks each serve a region of the country, providing various banking and supervisory services. For example, they audit the books of private-sector banks, to ensure that they are financially sound. Each regional bank is run by a board of directors chosen from the local banking and business community. The Federal Reserve Bank of New York has a special role: it carries out open-market operations , the main tool of monetary policy. Figure 13-5 shows the Federal Reserve districts and the city in which each regional Federal Reserve Bank is located. Decisions about monetary policy are made by the Federal Open Market Committee, which consists of the Board of Governors plus five of the regional bank presidents. The president of the Federal Reserve Bank of New York is always on the committee, and the other four seats rotate among the other 12 regional banks. The chairman of the Board of Governors normally also serves as the chair- man of the Open-Market Committee. The effect of this complex structure is to create an institution that is ultimately
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KW_Macro_Ch_13_Sec_04_The_Federal_Reserve_System - chapter...

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