Activity 1
The Fed in a Comic Book
1. The Balancing Act: Read pp. 1–5 and answer the following questions:
a. Why is the job of making monetary policy described on page 3 as “a balancing act”?
The Fed has to make sure money and credit do not grow too slowly or too rapidly.
b. What happens if money and credit grow too slowly? How will this affect people?
Too slowly = funds won’t be available for loans, businesses and people will find it harder to borrow to
make major purchases
c. What happens if money and credit grow too rapidly? How will this affect people?
Too rapidly = inflation – increase in price level
1. Incomes don’t rise as rapidly as prices – reduction in purchasing power.
2. uncertainty and instability in the economy.
d. What are the three main tools the Fed has to prevent both recession and inflation?
1. Open Market Operations
2. Reserve Requirements
3. Discount rate
2. Open Market Operations: Read pp. 6–8 and answer the following questions:
a. What are open market operations?
Open Market Operations: purchases and sales by the Fed of U.S. government securities; large IOUs of
the federal government.
b. What happens when the Fed buys securities?
Provides the banking system with additional funds to lend
c. What effect does the purchase of securities by the Fed have on interest rates?
Lowers the interest rate that banks charge on very short-term loans.
d. What happens when the Fed sells securities?
Banks have less to lend, federal fund rate (interest rate) may rise, and some borrowing may be
discouraged.
e. What effect does the sale of securities by the Fed have on interest rates?
Interest rates may rise.
3. Other Tools of the Fed: Read pp. 9–12 and answer the following questions:
a. Another tool of monetary policy is the reserve requirement. How does this work? Why is it seldom
used?
Reserve requirements are the percentages of certain deposits that banks must have either in their
own vaults or on deposit at the Fed. Reserve requirements are a powerful tool, because they affect
the ability of the banking system to create money.
The Fed rarely changes reserve requirements because frequent changes make it hard for bankers to
plan. In addition, raising the reserve requirements imposes a kind of tax or cost on banks.
b. Another tool of monetary policy is the discount rate. How does this work?
The Discount Rate is the interest rate the Fed charges banks on short-term loans. Changes in the
discount rate can influence other interest rates.
4. Financial Services of the Fed: Read pp. 12–23 and answer the following questions:
a. What financial services does the Fed provide for banks and the public? (pp. 13–14)
1. The Fed provides banks with cash to meet their customers’ needs
2. Fed stores excess money for banks and credits it to their accounts.
3. Fed counts bills and shreds bills
4. Fed processes about one-third of all checks written in the U.S.
b. What services does the Fed provide for the government? (pp. 16–17)
1. The Fed pays out federal income tax refunds by way of a government account at the Fed.
2. The Fed also plays a role in the government’s borrowing.
a. saving bonds applications are processed at the Fed.
3. The Fed administers the Legacy Treasury Direct accounts – holds electronic securities, debts or
IOUs issued by the Fed.
a. What is the relationship between the Fed and other banks? (pp. 17–18)
The Fed supervises banks in order to make sure they operate safely and soundly, and are sensitive to
risks.
1. makes sure banks have enough capital to withstand an economic downturn or unpaid
loans.
2. Examines bank operating procedures to make sure they are not susceptible to theft or
fraud by employees or others.
b. Describe the structure of the Fed. (pp. 19–22)
Board of Governors – consist of seven members, appointed by the President and confirmed by the
Senate.
12 Federal Reserve Banks spread around the country.
Federal Open Market Committee (FOMC) c. The Fed is more independent than any other part of the government. Why? (pp. 20–21)
Independence helps a central bank focus on long-term economic problems. Research shows that
countries with more central bank independence tend to be more successful in controlling inflation
that other countries.