Before reading about the origins of the US Federal Reserve, try this vocabulary activity.

Alan Greenspan stepped down as Governor of the Federal Reserve on January 31 2006 after helping guide the U.S. economy for more than 18 years. How much do we know about this institution that has so much influence over the world’s largest economy?

The U.S. Federal Reserve was created in 1913 by the US congress.. At this time there were more than 30,000 currencies in the U.S. Banks printed their own bank notes as did some ordinary shops. Some of these banknotes were guaranteed with gold and silver reserves, others were not. Sometimes banks did not have enough money to honour withdrawals by their customers. The Federal government in Washington had no control over the supply of money and very little control over the economy. There were frequent bank collapses and economic instability.

The Fed’s first task was to organise, standardise and stabilise the monetary system in the U.S. It had to create a system to deliver ‘liquidity’, in other words it had to make sure that banks could honour withdrawals for their customers. It also needed to create an ‘elastic’ currency, it needed a way of increasing and decreasing the country’s supply of money to control inflation and prevent economic depression. The Fed does not print money this is done by the US Mint.

Today the Fed has two divisions, the Board of Governors that is responsible for setting monetary policy and the twelve regional reserve banks that put into practice policy decided by the Board. The regional banks also oversee the nation’s financial institutions and carry out some commercial activities such as the processing of cheques for commercial banks. The revenue earned from these activities is used to fund the institution. The Federal Reserve receives no funding from the U.S. government.

The Fed has two principle goals, to maintain stable prices and to ensure maximum employment and production output. To achieve these goals it has to balance the short term goal of increasing output and employment with the longer term goal of maintaining low inflation.

The Fed has two main goals. The first goal is to maintain stable prices. The second goal is to ensure maximum employment and production output. To achieve both of these goals the Fed has to balance the short term increase of output and employment with the longer term maintenance of low inflation.

The Fed uses its controls over the short term interest rate to achieve its aims. The Board of Governors looks at key economic indicators such as the consumer price index (an indicator of the rate of inflation) and gross domestic product. It then decides whether to raise or lower the short term interest rate. This in turn decreases or increases the supply of money into the economy which influences the amount of economic activity and inflation in the economy.

Ben S. Bernanke took over as Governor from Alan Greenspan in 2006. He promised not to change the Fed’s policies that have helped deliver solid economic growth, low inflation and low unemployment for much of the past two decades.

Now decide whether these sentences are true or false.