Economics Chapter 16
The U.S. government pays out about _____________ each year to support _________________ programs
$1.2 trillion / social insurance
The Federal Reserve Act divided the United States into ___________________ - one Federal Reserve Banks is located in each district
12 Federal District
The Second Bank of the United States was established in ______ to restore order to the ________________ It lasted until __________, when its ___________ expired
1816 / monastery system 1836 / charter
About ________ of all United States banks belong to the ______________________
40% / Federal Reserve System
FOMC members include:
All 7 members of the Board of Governors 5 of the 12 district bank presidents President of the New York Federal Reserve Bank The six other district bank presidents who serve one-year terms on a rotating basis
_________________ can force banks to sell risky investments or to declare loans that will not be repaid as losses They can also classify an institution as a problem bank and force it to undergo more frequent examinations
Bank examiners
How do banks create money simply by going about their business making loans?
Banks earn income by charging interest on loans The maximum amount that a bank can lend is determined by the required reserve ratio (RRR), which is calculated as the ratio of reserves to deposits The RRR, which is established by the Fed, ensures banks will have enough funds to supply customers' withdrawal needs
The Federal Reserve System is overseen by the _________________ of the Federal Reserve
Board of Directors
When the __________ chooses to increase the money supply, it orders the trade desk at the Federal Reserve Bank of New York to purchase a certain quantity of _______________________ on the open market
FOMC / government securities
The _____________ studies proposed bank mergers and bank holding company charters to ensure competition in banking and financial industries
Fed Board
All banks have equal access to __________________ whether or not they are Fed members
Fed services
The _________________________ (FOMC) makes key monetary policy decisions about interest rates and the growth of the United States money supply
Federal Open Market Committee
In 1935, Congress adjusted the ___________________ so that it could respond more effectively to future crises
Federal Reserve
How does the Federal Reserve control the amount of money in use?
I. The Federal Reserve controls the amount of money in use by changing the required reserve ratio II. It can lower or raise the discount rate in order to decrease or increase the money supply III. The Fed also uses open market operations to buy and sell government securities, which can alter the money supply
____________________ are the buying and selling of government securities in order to alter the money supply; it is the most often-used tool of
Open market operations / monetary policy
The _________________ finally convinced Congress to act The nation's banking system needed to address two issues: Greater access to funds A source of emergency cash to prevent bank runs The Federal Reserve Act of 1913 attempted to solve these problems
Panic of 1907
A period of chaos and confusion followed _______________________ were difficult to enforce among the various state and federal chartered banks
Reserve requirements
How is the Federal Reserve System organized?
The Federal Reserve System has: •A seven-member Board of Governors with one governor acting as the chair •12 District Reserve Banks •2600 member banks
What does the Federal Reserve do in its role as the government's banker?
The Federal Reserve maintains a checking account for the Treasury Department that it uses to process Social Security checks, income tax refunds, and other government payments
What does the Federal Reserve do?
The Federal Reserve: •Serves as banker and financial agent for the U.S. government •Issues currency •Clears checks •Supervises lending practices •Acts as a lender of last resort •Regulates the banking system through reserve requirements and bank examinations •Regulates the money supply
How does monetary policy affect economic stability?
The timing of monetary policy can help support the Fed's efforts to create economic stability Monetary policy, properly administered, affects the money supply and, in turn, can help create a stable economy
Federal Reserve Act of 1913
This Act created the Federal Reserve System, which consists of 12 banks that can lend money to other banks in times of need
The ______________________________ is responsible for manufacturing money in the form of currency
U.S Department of Treasury
bank holding company
a company that owns more than one bank
money multiplier formula
a formula used to determine how much new money can be created with each demand deposit and added to the money supply
tight money policy
a monetary policy that decreases the money supply
easy money policy
a monetary policy that increases the money supply
excess reserves
bank reserves greater than the amount required by the Federal Reserve
Among the most important functions of the Fed is to provide ___________ and ________________ to the federal government
banking / fiscal services
To handle its _______________ when dealing with such large sums, the ______________ turns to the Federal Reserve
banking needs / federal government
Changes in the federal funds rate and the discount rate affect the cost of borrowing to __________ and other ___________________
banks / financial institutions
The money from the ____________ is deposited in the bond sellers' banks
bond sales
The FOMC may also decrease the money supply by selling __________ This operation reduces reserves in the banking system. The ________________ process then works in reverse.
bonds / money multiplier
Recent chairs have been economists from ______________, the academic world, or _______________
business / government
Higher interest rates discourage __________________
business spending
The more money held as __________, the easier it is to make __________________________
cash / economic transactions
The role of a ________________ in the U.S. economy has been hotly debated for many centuries
central bank
The new Fed enjoyed a more ________________ power so that the __________________ were able to act consistently with one another while still representing their own district's banking concerns
centralized / regional banks
The President also appoints the ________ of the __________________ from among these seven members
chair / Board of Governors
The Fed's most visible function is its _________________ responsibilities
check-clearing
The Fed uses these reserves to control how much money is in _________________ at any one time
circulation
If the economy is experiencing a ________________, the Fed will follow an ___________________ in order to increase the money supply which decreases interest rates
contraction / easy money supply
Over the past century, the Fed's power has expanded from its original role to include _____________ over the ___________________ of the money supply
control / rate of growth
Federal Reserve System
created by Congress. in 1913 as the central bank of the United States. Intended to serve as "lender of last resort" to banks during a liquidity crisis Considered to be an independent agency that derives its powers directly from Congress
Under the Federal Reserve System, only the federal government can issue ___________, which takes place at the ____________________
currency / United States Mint
The First Bank of the United States, which issued a single _______________ and reviewed ___________________, only lasted until 1811, when Congress refused to extend its charter
currency / banking practices
Banks lend each other money on a ______________ basis, using money from their ___________________
day-to-day / reserved balances
reserves
deposits that a bank keeps readily available as opposed to lending them out
To judge whether its open market operations are having the __________________ on the economy, the Fed periodically evaluates one or more economics targets Close analysis of these targets helps the Fed meet its goal of promoting a _________ and _______________ economy
desired effect / stable / prosperous
The Fed sets the ___________________ and it keeps this rate above the federal funds rate
discount rate
The Fed changes the ________________ less frequently and today, the Fed does not change reserve requirements to conduct ___________________
discount rate /monetary policy
The Fed acts as a lender of last resort, making _________________ to ___________________ so that they can maintain required reserves
emergency loans / commercial banks
If the economy is experiencing a rapid ______________ that may cause ______________, the Fed will introduce a tight money policy to reduce the money supply
expansion / inflation
Each _____________________ that holds ______________ for customers must report daily to the Fed about its reserves and activities
financial institution / deposits
FOMC's decisions can affect __________________ and rates for ________________ as well as many economic institutions around the world
financial markets / mortgages
In an ideal world, where real GDP grew smoothly and the economy stayed at ________________, the Fed would ______________ the money supply just to match the growth in the ________________ for money
full employment / increase / demand
The Fed can clear millions of checks at any one time using _______________________ Most checks clear within ______ days
high-speed equipment / two
An ______________ money supply will lower interest rates and a ________________ money supply will raise interest rates
increased / decreased
Too much money in the economy leads to ______________. It is the Fed's job to prevent this by keeping the money supply stable
inflation
The cost of money is the ___________ The market for __________ is like any other market! If the supply is higher, the price of money (interest rate) is _________. If the supply is lower, the price of money (interest rate) is _________
interest rate / money / lower / higher
As _________________ rise, people and firms will generally keep their _________ in assets that pay returns
interest rates / wealth
Lower interest rates encourage greater ____________________ by business firms because a firm's cost of _____________ decreases as the interest rate decreases
investment spending / borrowing
The Fed coordinate the regulating activities of banks, savings and __________________, credit unions, and _____________________
loan companies / bank-holding companies
In setting its monetary policy goals, the Fed keeps close touch on __________________, studying ____________ and ________________ to determine its policy
market funds / inflation / business cycle
To enact ____________________, the Fed primarily adjusts the ____________________ - the interest rate that banks charge each other for loans
monetary policy / federal funds rate
Monetary policy alters the supply of ___________, which, in turn, affects ______________ Interest rates affect the level of _________________ and ______________ in the economy
money / interest rates / investment / spending
In this way, funds enter the banking system, setting the _________________ in motion
money creation process
The general level of income also influences _______________
money demand
The Fed's job is to consider various measures of the _________________ and compare those figures with the likely demand for money
money supply
The Federal Reserve is best known for its role in regulating the ________________________
nation's money supply
All ________________________ banks are required to join the Federal Reserve System
nationally chartered
The Fed and other regulatory agencies also examine banks ______________ to make sure that each institution is obeying _________ and __________________
periodically / laws / regulations
These changes, in turn, affect the ________________, which is the rate of interest that banks charge on short-term loans to their best customers These rates are all short-term rates. To influence long-term rates, the Fed uses other tools
prime rate
Monetary policy refers to the actions that the Fed takes to influence ___________ and the rate of ___________ in the economy by altering the money supply
real GDP / inflation
The simplest way for the Fed to adjust the amount of reserves in the banking system is to change the _____________________
required reserve ratio
Banks can also borrow money from the Fed. They do this ___________ and especially during ____________________
routinely / financial emergencies
The Fed also sells, transfers, and redeems ______________, such as government bonds, bills, and notes
securities
This _________________________ is appointed by the President with the advice and consent of the Senate
seven-member board
Each of the 2,600 member banks contributes a _______________ of money to join the system, which means the banks themselves own the Fed, keeping the system politically _________________
small amount / independent
The Federal Reserve System's most prominent task is to act as the main ________________ for the country's __________________
spokesperson / monetary policy
To ensure _____________, the Federal Reserve monitors bank reserves throughout the banking system
stability
If ____________________ is not timed properly, it can make the business cycle worse
stabilization policy
Each district is made up of more than one ___________ and Congress regulates the ___________ of each Reserve Banks' board of nine directors to make sure it represents many ____________
state / makeup / interests
___________________ banks join voluntarily
state chartered
The discount rate today is primarily used to ensure that ___________________ are available in the economy; it is the rate the Fed charges members banks for loans
sufficient funds
monetary policy
the actions that the Federal Reserve System takes to influence the level of real GDP and the rate of inflation in the economy
reserve requirements
the amount of reserves that banks are required to keep on hand
monetarism
the belief that the money supply is the most important factor in macroeconomic performance
open market operations
the buying and selling of government securities in order to alter the supply of money
required reserve ration (RRR)
the fraction of deposits that banks are required to keep in reserve
federal funds rate
the interest rate that banks charge each other for loans
discount rate
the interest rate that the Federal Reserve charges commercial banks for loans
check clearing
the process by which banks record whose account gives up money and whose account receives money when a customer writes a check
money creation
the process by which money enters into circulation
prime rate
the rate of interest that banks charge on short-term loans to their best customers
outside lag
the time it takes for monetary policy to have an effect
inside lag
the time it takes to implement monetary policy
Monetary policy must be carefully ________ Policies with good timing achieve __________________ Properly timed stabilization policy, which makes peaks a little bit lower and troughs not quite so deep, helps smooth out the business cycle
timed / economic stability
The Fed also protects consumers by enforcing ________________ laws, which require sellers to provide full and accurate information about loan terms
truth-in-lending
Why did the Fed fail to prevent the financial crisis that led to the Great Depression?
• Congress hoped to avoid a situation like the Great Depression by creating the Fed, but it failed to do so • The system did not work well because the regional banks each acted independently • By the time Congress forced the Fed to take strong action in 1932, it was too little, too late
