Money, Banking, and Financial Markets Practice Test: Central Banks and the Federal Reserve System — Flashcards

The Federal Reserve is the central bank of the United States. Central banks help financial systems run smoothly and reduce the likelihood of financial crises. 

The Federal Reserve's three main functions are:
Provide banking services: The Federal Reserve provides banking services to commercial banks, other depository institutions, and the federal government.
Promote financial stability: The Federal Reserve promotes the stability of the financial system.
Monetary policy: The Federal Reserve uses monetary policy to control the amount and growth of the money supply in the economy. 

The Federal Reserve is an independent body, although the U.S. government attempts to influence it. 
The Federal Reserve System also has a branch called the Federal Open Market Committee (FOMC) that determines the direction of monetary policy. 

Central banks also function as the controller of credit in the economy. For example, commercial banks create a lot of credit in the economy that increases the inflation. The central bank controls the way credit creation by commercial banks is done by engaging in open market operations.

Related Test: Money, Banking, and Financial Markets Practice Test: The Banking Industry