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How are Banks and the Fed Linked? Teaching Key Concepts Today

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Authors: Jane Ihrig, Gretchen Weinbach & Scott Wolla, Federal Reserve Board, Washington, DC, USA

This article walks through the roles of banks and the Federal Reserve (the Fed) in the financial system and describes the key linkages between the two, using current concepts. Because many introductory economics textbooks are not up-to-date on key concepts, we highlight two crucial mistakes often taught in the classroom: (1) using an outdated description of Fed operations that rely on open market operations instead of focusing on the Fed’s administered interest rates, and (2) relying on the money multiplier equation, which broke down over time and is now no longer definable. We provide recommendations for the key themes that should be part of a current introductory economics curriculum and note many resources that are available for instructors seeking to update their materials.

Jane Ihrig et al., “How are Banks and the Fed Linked? Teaching Key Concepts Today,” Review of Political Economy 35, no. 2 (2023): 555-571,