Intro to Macro - The Federal Reserve System - The Federal Reserve System Fractional reserve banking is not usually a problem for banks because on a

Intro to Macro - The Federal Reserve System - The Federal...

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The Federal Reserve System Fractional reserve banking is not usually a problem for banks because on a typical day, about as much money is deposited as is withdrawn. bank run : a situation in which many depositors simultaneously decide to withdraw money from a bank. o has not happened anytime recently it is possible for one bank to handle a run by borrowing from other banks today, deposits are guaranteed through the Federal Deposit Insurance Corporation (FDIC) - each depositor is insured to at least $250,000 per insured bank - so bank runs are rare Bank panic : a situation in which many banks experience runs at the same time an economy's central bank (the agency that regulates the money supply) can help stop a bank panic by acting as a lender of last resort that makes loans to banks that cannot borrow funds elsewhere. Federal Reserve (the Fed) : the central bank of the United States. o The Fed is a quasi-governmental agency that is financially independent from the federal government; it is a corporation that earns more than enough to finance its operations without being funded by Congress. o The Fed was originally established by Congress in 1913 to stop banking panics by acting as a lender of last resort, but today its main goals are to control the money supply and to act as a bankers' bank. o To aid the Fed in carrying out its responsibilities, Congress divided the country into 12 Federal Reserve Districts, each of which has its own Federal Reserve Bank that provides services to banks in that district. o the real power of the Fed lies in Washington D.C. with the board of governors, which consists of seven members who are appointed by the o one of the 7 board members is appointed chairman for a 4-year, renewable term (Ben Bernanke since Jan, 2006)

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