14.5 Fed Functions, Responsibilities, and Independence

What is the Fed’s role in issuing currency?

The Fed issues Federal Reserve Notes, the paper money used in the U.S.

What does “A1” or “B2” on a bill mean?

It identifies which Federal Reserve Bank issued the bill (e.g., A1 = Boston, B2 = New York).

What are reserve balances?

Deposits that banks and thrifts keep at the Fed.

What are reserve requirements?

The percentage of checkable deposits banks must hold as reserves to meet withdrawal demands.

What is the discount rate?

The interest rate the Fed charges banks for short-term loans.

What does “lender of last resort” mean?

The Fed lends to banks and key financial firms during crises to prevent collapse.

How does the Fed help with check collection?

It clears checks by adjusting reserve balances between banks.

What happens when a check is deposited in a different bank?

The Fed reduces reserves from the check writer’s bank and adds them to the recipient’s bank.

What does it mean that the Fed is the government’s fiscal agent?

It handles the government’s money — collecting taxes, making payments, and managing bond sales.

How does the Fed supervise banks?

It checks for profitability, regulatory compliance, and signs of fraud

What is the Fed’s most important responsibility?

Controlling the money supply and interest rates to support full employment and price stability.

Why is this function not routine?

It requires policy decisions that respond to changing economic conditions, like during COVID-19.

Why is the Fed independent from Congress and the President?

To avoid political pressure that could lead to inflationary policies

What could happen if elected officials controlled monetary policy?

They might keep interest rates too low to please voters, risking inflation

What’s the benefit of central bank independence?

Countries with independent central banks tend to have lower inflation.

Which of the following are functions that the Federal Reserve Banks perform?

• Lending money to financial institutions

• Setting reserve requirements and holding reserves

• Issuing currency

Congress purposely established the Federal Reserve Bank as a(n) ________ agency of government.

independent