Lesson 6.01 The Federal Reserve System

Before we start the lesson, read the definitions of vocabulary that will be introduced in the lesson.

Fullscreen version   Text-only version

You will focus on learning the history of the creation of the Federal Reserve System. The ups and downs of the economic cycle have shown the need for an entity in control of the money supply of a nation. The Federal Reserve was created in 1913 to watch over the economic needs of our nation.

The Federal Reserve Act divided the nation into twelve districts. Each district has a main Federal Reserve Bank and smaller branch banks. In charge of the whole operation is a seven-member Board of Governors chosen by the presidents to serve fourteen-year terms. The Board of Governors and Federal Reserve Banks are an independent organization outside the control of the government. The powers of monetary policy are so great that it was decided that removing the decisions about it would be best served if as much political unfluence were removed as possible.

Use the resources below to complete 6.01 Basics of the Federal Reserve System. Be sure to save your work! You will submit it for a grade later in the lesson.

1. The Fed's Regional Structure
2. History of the Federal Reserve
3. The Structure of the Federal Reserve System
4. Federal Reserve Districts

Now that you have a basic understanding of Monetary Policy, The Federal Reserve System structure and the tools of the Federal Reserve, it is time to gain a little practice in how the Federal Reserve manipulates the economy.

The basic response by the Fed to keep inflation in check while the economy is growing is to apply a contractionary policy. A contractionary policy limits the money supply and causes interest rates to increase. This increase in interest rates causes businesses and consumers to borrow less money which decreases consumer spending and investment spending. Aggregate demand will shift to the left.

The response by the Fed to help reduce unemployment when the economy is in a recession is to apply an expansionary policy. An expansionary policy injects money into the economy which causes interest rates to decrease. With a decrease in interest rates consumers and businesses borrow more, which causes aggregate demand to shift to the right.

Use The Federal Reserve: Monetary Policy and Federal Reserve System (search tool) to complete 6.01 Tools of the Federal Reserve. Be sure to save your work! You will submit it for a grade later in the lesson.