The Federal Open Market Committee (FOMC)is made up of the seven members of the Board of Governors and five
of the presidents of the Federal Reserve Banks. This committee is responsible for setting the nation’s monetary policies
to stabilize our economy. The FOMC sets the Fed’s monetary policy by directing the sale and purchases of government
securities in the open market.
The 12 District Banks
The 12 district banks collectively form the nation’s central bank. The central bank was established to accommodate the
economic and geographic diversity of the nation. The 12 banks are located all over the country, from New York to
California. While the locations of these member banks are not important for the AP exam, their functions are.
The Functions of the Federal Reserve
The Federal Reserve is responsible for being the central monetary authority in the United States. With this responsibil-
ity the Federal Reserve performs its duties with the intention of creating macroeconomic harmony. Following are the
responsibilities of the Federal Reserve:
■ Issuing currency:The Federal Reserve does not print money. Rather, the Fed issues the money that is printed. It
decides just how much of the printed money should be released into the economy. This includes paper money and
coins.
■ Setting the reserve requirements:The Fed sets the reserve requirement for banks in the nation. The reserve re-
quirementis the fraction or percentage of a checking account balance that must be maintained in banks’ reserves.
■ Lending money:The Federal Reserve occasionally lends money to other banks and charges them an interest rate
on this money called the discount rate. When banks’ reserves are running low, the Fed lends them money to re-
plenish their vaults.
■ Supervising banks:The Fed examines other banks to make sure that they are adhering to the standards and regula-
tions that the Fed has set for appropriate monetary policy. The Fed is ultimately responsible for developing a course
of action for economic policies; therefore, it is in the Fed’s best interest to see that banks carry out these policies.
■ Securities intermediary:The Fed acts as the government’s bank. The government’s collection of taxes, spending
of revenue, and the buying and selling of open market securities is done through the Federal Reserve.
■ Controlling the money supply:The Federal Reserve controls the money supply. It regulates how much money is
made available to the general public. The careful regulation of the money supply is a task the Fed is most associ-
ated with because of its economic impact.Mini-Review
- What is the FOMC?
A. The committee that regulates taxation
B. The government’s revenue collectors
C. The committee that sets monetary policies
D. The committee that is made up of four banks
E. Both A and B - The Board of Governors contains how many members?
A. 5
B. 6
C. 4
D. 7
E. 9
Part II: Macroeconomics