Describe the role the Federal Reserve System plays in the distribution of currency.

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rrteacher | College Teacher | (Level 2) Educator Emeritus

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The Federal Reserve affects the amount of currency in circulation in several different ways. First, the Fed can establish reserve-level rates, which dictate the amount of money banks must keep on hand. By lowering the rates, they increase the amount of money that banks are able to lend out. Second, the Fed can set discount rates, in other words, interest rates on the money that member banks borrow from it. The higher the rate, the less member banks can borrow, and the less individual consumers can borrow from the banks. Similarly, the federal funds rate, or the charge on overnight loans from member bank to member bank, can be set by the Fed. Finally, the Federal Reserve System purchases government paper, or securities like bonds, on the market. Since they purchase these from banks, the more they purchase, the more money is in circulation. Of these methods, changing margin rates is the least common. The last method, buying securities, has become controversial in recent years, as the Fed has purchased securities with money created for that purpose, a practice known as quantitative easing.

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