TEKS 113.31(d)(12), Social Studies (Economics)
Subject: Economics – High School
TEKS 113.31(d)(12)
Summary of TEKS 113.31(d)(12)
TEKS 113.31(d)(12) explains the role of the Federal Reserve in managing the economy. The Fed’s structure allows it to oversee monetary policy effectively. By using tools like reserve requirements, interest rates, and open-market operations, the Fed controls the money supply to promote economic stability. Additionally, the U.S. dollar remains crucial in global trade, especially after departing from the gold standard.
Key Concepts of TEKS 113.31(d)(12)
- Structure of the Fed: Includes the Board of Governors, regional banks, and the FOMC.
- Monetary Policy Tools: Reserve requirements, interest rates, and open-market operations manage the economy.
- Impact on Money Supply: The Fed balances inflation, unemployment, and growth by controlling the money supply.
- Global Role of the U.S. Dollar: As a reserve currency, the dollar is essential in international trade, especially after moving to a fiat system.
Section 1: What Is the Structure of the Federal Reserve System?
TEKS 113.31(d)(12)(A)
Explanation: The Federal Reserve is a network that manages the U.S. money supply and banking system. It has three main parts:
- Board of Governors
- Located in Washington, D.C., this group oversees the entire Federal Reserve System.
- Seven members serve staggered terms, ensuring continuity in leadership.
- Example: They set policies and supervise the Fed’s operations.
- Federal Reserve Banks
- There are 12 regional banks across the U.S., each serving a specific area.
- These banks distribute money, provide loans to other banks, and monitor regional economies.
- Example: The Dallas Federal Reserve serves Texas and surrounding states.
- Federal Open Market Committee (FOMC)
- This group decides on monetary policy, such as interest rates and open-market operations.
- It includes the Board of Governors and five regional bank presidents.
Key Idea: The Federal Reserve’s structure ensures the economy is managed locally and nationally.
Example of TEKS 113.31(d)(12)(A): How the Federal Reserve Works Together
Imagine the economy is experiencing rising inflation, meaning prices for everyday items like groceries and gas are increasing rapidly. The Federal Reserve steps in to help manage the situation using its three main parts:
- Board of Governors
The Board of Governors, based in Washington, D.C., reviews the inflation data and determines that a change in monetary policy is necessary. They set a goal to reduce inflation by increasing interest rates, which can slow down borrowing and spending. - Federal Reserve Banks
The Dallas Federal Reserve, one of the 12 regional banks, works to implement this decision in its region. It communicates with local banks, providing updated guidelines and loans as needed. It also collects data on how inflation is impacting Texas and surrounding states, sending this information back to the Board of Governors for review. - Federal Open Market Committee (FOMC)
The FOMC, which includes the Board of Governors and five regional bank presidents, meets to decide the exact changes to interest rates. After careful discussion, they vote to raise the rates by a small percentage. This decision affects the entire nation, helping to control inflation by making borrowing more expensive and encouraging savings.
This coordinated effort shows how the Federal Reserve operates at both national and regional levels. The Board sets policies, regional banks manage local economies, and the FOMC adjusts monetary policy to keep the economy stable.
Section 2: What Are the Fed’s Tools for Monetary Policy?
TEKS 113.31(d)(12)(B)
Explanation: The Federal Reserve uses three main tools to manage the U.S. economy:
- Reserve Requirements
- The Fed requires banks to keep a certain percentage of their money in reserve.
- If the reserve requirement is high, banks lend less, reducing the money supply. If it’s low, banks lend more, increasing the money supply.
- Example: A bank might need to keep 10% of deposits in reserve and can lend out the other 90%.
- Discount Rate and Federal Funds Rate
- The discount rate is the interest rate the Fed charges banks for loans.
- The federal funds rate is the interest rate banks charge each other for short-term loans.
- Example: Lower rates encourage borrowing and spending, while higher rates slow the economy.
- Open-Market Operations
- The Fed buys or sells government securities to adjust the money supply.
- If the Fed buys securities, it adds money to the economy. If it sells securities, it reduces money in circulation.
- Example: During a recession, the Fed buys securities to inject money into the economy.
Key Idea: These tools help the Fed control inflation, unemployment, and economic growth.
Example of TEKS 113.31(d)(12)(B): How the Federal Reserve Manages the Economy Using Its Tools
Imagine the economy is slowing down, and people are spending less money. The Federal Reserve steps in to stimulate the economy by using its three main tools:
- Reserve Requirements
The Fed lowers the reserve requirement from 10% to 8%, allowing banks to lend more money. For example, if a bank receives $100 in deposits, it now only needs to keep $8 in reserve and can lend out $92. This extra lending makes more money available for businesses and consumers. - Discount Rate and Federal Funds Rate
The Fed reduces the discount rate and federal funds rate to encourage banks to borrow money. With lower rates, banks can offer cheaper loans to consumers and businesses. For instance, a business might take out a loan to expand, which creates jobs and boosts economic activity. - Open-Market Operations
To further stimulate the economy, the Fed buys government securities from banks. By purchasing these securities, the Fed injects money directly into the banking system. This added money increases the funds available for lending and spending.
Using these tools, the Federal Reserve helps the economy recover by encouraging borrowing, spending, and investment, showing how it manages the money supply and promotes growth.
Section 3: How Does the Fed Affect the Nation’s Money Supply?
TEKS 113.31(d)(12)(C)
Explanation: The Fed’s actions directly impact how much money is available in the economy.
- Increasing Money Supply:
- Lowering interest rates and buying securities encourage borrowing and spending.
- Example: During a recession, the Fed might lower rates to help businesses and consumers spend more.
- Decreasing Money Supply:
- Raising interest rates and selling securities slow borrowing and spending to control inflation.
- Example: If inflation is too high, the Fed might increase rates to reduce demand.
Key Idea: The Fed balances the money supply to promote economic stability.
Example for TEKS 113.31(d)(12)(C): How the Federal Reserve Balances the Money Supply
Imagine the economy is in a recession, and businesses are struggling because consumers aren’t spending enough. To increase the money supply:
- Increasing Money Supply
The Fed lowers interest rates, making it cheaper for businesses to borrow money for investments and for consumers to take out loans. For example, a small business might borrow money to buy new equipment, which creates jobs and boosts spending. The Fed also buys government securities, injecting more money into the banking system to encourage lending and economic growth.
Now, imagine the economy is growing too fast, causing prices to rise rapidly (inflation). To decrease the money supply:
- Decreasing Money Supply
The Fed raises interest rates, making borrowing more expensive and slowing down consumer and business spending. For instance, higher mortgage rates might discourage people from buying homes, reducing demand. The Fed also sells government securities, pulling money out of the economy to cool inflation.
By increasing or decreasing the money supply, the Fed helps balance the economy, promoting growth during slowdowns and controlling inflation during rapid expansions.
Section 4: What Is the Role of the U.S. Dollar in Global Trade?
TEKS 113.31(d)(12)(D)
Explanation: The U.S. dollar plays a major role in international trade.
- Global Reserve Currency:
- Many countries use the U.S. dollar as a standard for international trade and as a reserve currency.
- Example: Oil is often priced in dollars, so countries need dollars to buy it.
- Impact of Leaving the Gold Standard:
- Before 1971, the U.S. dollar was backed by gold, meaning every dollar represented a specific amount of gold.
- After 1971, the dollar became fiat money, meaning its value comes from trust in the U.S. government.
- Example: Since leaving the gold standard, the U.S. has had more flexibility to manage its money supply.
Key Idea: The U.S. dollar is vital to global trade, but its value depends on trust and economic stability.