Question

Identify three functions of the Federal Reserve, other than its main role of controlling the supply of money.

Short answer

The three major functions of the Federal Reserve are to

1. issue Federal Reserve Notes,
2. set the reserve requirements
3. lend money to financial institutions and serve as the lender of last resort in national financial emergencies.

Step-by-step solution

Step 1. Issuing Currency

The Federal Reserve is vested with the power of issuing currency in the United States. The paper currency or dollars, so to say, are issued by the Federal Reserves. These currency notes are backed up by the Governor and are treated as legal tender in the United States.

Step 2. Setting reserve requirements and holding reserves

The Federal Reserve sets the requirement of the reserves, which is a certain portion of the checkable deposits that the commercial bank needs to keep with the federal bank and hold these reserves. Such reserves play a very important role in controlling the economy's money supply and are treated as the tool of monetary policy.

Step 3. Lending to financial institutions and serving as an emergency lender of last resort 

The Federal Reserve is known as the lender of last resort since they grant loans to commercial banks when they are in an emergency and need money. The loans are usually short-term, on which the Federal Reserve charges an interest rate known as the discount rate.