Economics Today and Tomorrow

Chapter 15: The Federal Reserve System and Monetary Policy

Chapter Overviews

Congress created the Federal Reserve System in 1913 as the central banking organization in the United States. Chapter 15 analyzes the organization and functions of the Fed, as it is called, and explains how the supply of money is regulated and why.

Powers of the Fed
Section 1 discusses how the Fed is a system of banks whose power is shared by a governing board and 12 district banks. Section 2 explains how the Fed uses monetary policy to affect the rate of growth of the money supply and how loose money and tight money policies affect the cost and availability of credit. This section also explores the idea of money expansion in the banking system and describes fractional reserve banking, the basis of the United States' banking system. The Fed uses several methods to regulate the money supply—changing the reserve requirement, changing the discount rate, and open-market operations. Section 3 explores each of these methods and explains the difficulties of monetary policy.