Function of the FED

-It issues paper currency 

-sets reserve requirements and holds reserves of banks

-lends money to banks and charges them interest

-they are a check clearing service for banks

-It acts as personal bank for the Government

-supervises member banks

-Controls the money supply in the economy

How banks work

Asset

• Reserves
• Required reserves(rr) - % required by FED to keep on hand to meed demand.
• Excess reserves(er) - % reserves over and above the amount needed to satisfy minimum Reserve ratio by FED
• Loans to firms, consumers, & other banks (earn interest)
• Loans to government (if the bank fail could sell the building/property) 

liabilities + Equity

• Demand deposits ($ put into bank)
• Timed deposits(CD)
• Loans from: FED reserves & other banks
• Shareholders equity

Creating a bank:

• Transaction
• Depositing reserves in a FED. reserve banks
• Required reserves
• Reserve ratio commercial banks required reserve/commercial banks checkable deposit liability 
• Excess Reserve