Final answer:
The Federal Reserve System is the central bank of the United States, established in 1913 to regulate financial institutions, maintain the payment system, and influence the economy through monetary policy, including setting interest rates.
Step-by-step explanation:
The Federal Reserve System was established in 1913 and acts as the central bank of the United States. It is not a source of financing at low or no cost; rather, it has several crucial functions, including regulating financial institutions, conducting monetary policy, maintaining the payment system, and ensuring consumer protection. The Federal Reserve, often referred to as 'the Fed,' is responsible for supervising member banks, bank holding companies, maintaining the nation's currency, and overseeing truth-in-lending laws. It also plays a role in the operation of the international monetary system by holding reserves to meet financial obligations.
The Fed influences the economy by setting interest rates such as the "discount rate," which is the rate at which banks can borrow money from the Federal Reserve. During economic downturns, the Fed may lower this rate to promote borrowing and spending, while during inflationary periods, it would raise the rate to cool down the economy. The banking system in the U.S. operates on a fractional reserve system, where banks are required to keep a fraction of their deposits in reserve, ensuring the stability of the banking system and the protection of depositors.