Question

1. Describe how the Federal Reserve is organized. Include a diagram with your answer.

2. Discuss briefly how open market operations work. Include a diagram with your answer.

3. Illustrate (make graphs) how the different slopes of the aggregate supply curve could change the impact of monetary policy.

Answer 1

1.  The Federal Reserve System is the central bank of the United States. It was founded in 1913 by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

It is a federal system, composed of a central, independent governmental agency--the Board of Governors--in Washington, D.C., and 12 regional Federal Reserve Banks, located in major cities throughout the nation. These components share responsibility for supervising and regulating certain financial institutions and activities; providing banking services to depository institutions and to the federal government; and ensuring that consumers receive adequate information and fair treatment in their business with the banking system.

The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. The Board Chair serves as the Chair of the FOMC; the president of the Federal Reserve Bank of New York is a permanent member of the Committee and serves as the Vice Chairman of the Committee. The presidents of the other Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis. All of the Reserve Bank presidents, including those who are not voting members, attend FOMC meetings, participate in the discussions, and contribute to the assessment of the economy and policy options. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit. The FOMC also authorizes currency swaps and large-scale asset purchases.

Federal Reserve Banks were established by the Congress as the operating arms of the nation's central banking system. Many of the services provided to depository institutions and the federal government by this network of Reserve Banks are similar to services provided by commercial banks and thrift institutions to business customers and individuals. However, the Federal Reserve Banks do not provide banking services, including accounts, to individuals.

Reserve Banks:

• provide accounts to depository institutions--banks, thrifts, and credit unions--in which those institutions hold reserve balances, make loans to depository institutions, move currency and coin into and out of circulation, collect and process millions of checks and other payments each day, provide checking accounts and other services for the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government;
• supervise and examine all bank holding companies and commercial banks that are members of the Federal Reserve System for safety and soundness; and
• participate in the setting of monetary policy

Detailed Structure can be seen in the image below: