The Influence of Central Banks

Central banks are typically government-managed or sponsored and play a significant role in some countries' banking systems. The Federal Reserve Bank in the United States sets things such as interest rates, which influence borrowing costs. Read this section and complete the exercises at the end.

The Federal Reserve Banking System and Central Banks

Learning Objectives

By the end of this section, you will be able to:

  • Explain the structure and organization of the U.S. Federal Reserve
  • Discuss how central banks impact monetary policy, promote financial stability, and provide banking services


In making decisions about the money supply, a central bank decides whether to raise or lower interest rates and, in this way, to influence macroeconomic policy, whose goal is low unemployment and low inflation. The central bank is also responsible for regulating all or part of the nation's banking system to protect bank depositors and insure the health of the bank's balance sheet.

The organization responsible for conducting monetary policy and ensuring that a nation's financial system operates smoothly is called the central bank. Most nations have central banks or currency boards. Some prominent central banks around the world include the European Central Bank, the Bank of Japan, and the Bank of England. In the United States, the central bank is called the Federal Reserve - often abbreviated as just "the Fed". This section explains the organization of the U.S. Federal Reserve and identifies the major responsibilities of a central bank.


Source: Rice University, https://opentextbc.ca/principlesofeconomics/chapter/28-1-the-federal-reserve-banking-system-and-central-banks/
Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 License.