1. John Smith, a Minnesota native, has recently been elected to the U.S. House of Representatives. John, a long-time college professor, was elected on a platform of educational reform. Somehow, John finds himself appointed to the Joint Economic and Financial Services Committees. John is having a hard time understanding the testimony before each committee, but is hesitant to ask too many questions. Explain the three functions of the Federal Reserve.

U.S. banking and finance is regulated by a number of government bodies. At the highest level is the nation’s central bank, The Federal Reserve System. Established by the U.S. Congress in 1913, the Federal Reserve System employs a number of tools to serve three main functions. Understanding the first of these functions may seem complex, but if we draw comparisons to personal banking, the concept isn’t quite so towering. As the government’s bank, the Federal Reserve System lends money to the federal government to fund deficit much as an individual’s personal bank might lend them money. An individual may wish to engage in certain spending endeavors, but lacks the funds with which to do so. When these endeavors are funded by the bank, of course, the individual must repay the debt. The bank decides how much it can lend. In this way the bank has some control over the money supply of the individual. The Federal Reserve is not unlike the government’s personal bank. This may lead one to wonder where banks acquire the money to lend. As the Banker’s Bank, the Federal Reserve System again plays an important role. In this instance the bank in the previous passage becomes something like the borrower therein. Banks can borrow money from the Federal Reserve System. They can, and are even required to, store funds there. These funds are utilized also in clearing millions of checks from bank to bank each day. If a friend needed