Final answer:
The Federal Reserve is required to return its profits to the U.S. Treasury. Its main functions include managing monetary policy, ensuring bank stability, and regulating the money supply. The Fed influences economic activity through various tools like the discount rate, federal funds rate, and open-market operations.
Step-by-step explanation:
When the Federal Reserve System (Fed) makes profits, it is required to transfer its net earnings to the U.S. Treasury. The Fed's primary goal isn't to make a profit but to manage the nation's monetary policy, including influencing the level of economic activity and ensuring a stable banking system. After paying its expenses, the Fed returns most of its earnings, which come from interest on government securities and interest on foreign currency investments, as well as fees for services provided to banks.
The fractional reserve system, which forces banks to keep a portion of deposits as reserves, supports the Fed's goal of preventing banks from lending out all the money deposited, thus ensuring the security of both the banks and depositors. The Fed also manages the money supply and ensures enough currency circulation, notably adjusting amounts during peak times, such as the Christmas shopping season.
Furthermore, the Fed's role extends to setting important rates, like the discount rate and the federal funds rate, and conducting open-market operations to influence liquidity and the overall economy. Their actions affect interest rates, and thus, the money supply and economic activity.