Federal Reserve System Reading Questions

What is a government security?

A bond (IOU) that happens to be issued by the government.

What does the Fed influence by lowering or raising the discount rate?

By lowering or raising the discount rate, the Fed influences how much money it costs people to borrow from the bank.

What occurs in a bank panic?

Disasters occur, which would lead to the failure of one bank and cause the spread to more banks. The more the banks fail, the bigger it affects the economy.

What is the reserve requirement?

How much money that each bank is required in order to keep on hand.

Why was the Federal Reserve created?

It was created for the reason that the nation had experienced several banking crisis (disasters) and panics.

What is the third method used by the Fed to control and manage the economy?

Its method to to control and manage the economy is to change the discount rate, which the Fed charges banks to borrow their cash.

What was the purpose of the Federal Reserve Act of 1913?

Its purpose was to bring strength and stability to the U.S. banking system.

Which monetary policy tool is used most often?

Open-market Operations, the reference to the purchase and selling of government securities (known as treasury bills).

What does the Federal Reserve do with treasury bills when it desires to slow down the economy?

The Fed sells treasury bills when it desires to slow down the economy.

Who decides on when and how to use the three main monetary tools?

The Federal Open Market Committee (FOMC), which is made up of members of the Federal Reserve, decides on when and how to use the three main monetary tools to have the economy speed up or slow down.

How is the Fed able to influence the economy?

The central banking system is able to influence the economy when they create an increase in money supply and encourage economic growth. And then, when the Fed has the feeling that the economy needs to slow down, they will decrease the money supply.

What happens to the cost of money when the Fed increases the interest rate?

The cost of money is made more expensive when the Fed increases the interest rate and it slows the economy down.

What is the discount rate?

The interest that the Fed charges banks in order to borrow money.

What is the key function of the Fed?

The key function of this bank is to ensure the banking system stays safe, provides financial services to both the banks and the government, and promotes a healthy economy by doing the use of monetary tools.

What was the role of the Federal Reserve after economic disasters like the Great Depression?

The role of this bank would be the expansion of the banking system and the attempt to maintain management over the U.S. economy.

What are three things the Fed processes daily in large numbers?

The three things are that the bank: Processes millions of payments about everyday. Makes the process of electronic money transfers each day. And provides a service known as check clearing.

What is the money supply?

The total amount of money that is in circulation.

What does the Federal Reserve do with government securities (bonds) when it desires to speed up the economy?

This central banking system buys and sells government securities (bonds) when it desires to speed up the economy.

What is monetary policy? What are the two goals of monetary policy?

This policy is the decisions the Fed makes to ensure the management of money supply and to have influence on the economy. The two goals are a healthy economy and a stable economy.

When the Fed lowers the interest rate, what happens to the cost of money?

When the it lowers the interest rate, the cost of money is made cheaper for people to borrow and use. This leads to an increase in the supply of money.

When the Fed increases the reserve requirement for banks, what is it doing to the money supply?

When this bank increases the reserve requirement for banks, it is decreasing the money supply as money gets deducted from the market.

When the Fed decreases the money supply they are trying to do what?

When this banking system decreases the money supply, they are trying to make a decrease in the money supply to slow down the economy.

When the Fed increases the money supply, they are trying to encourage what?

When this banking system increases the money supply, they are trying to encourage economic growth. This makes more money available for both people and businesses to spend.

When using the reserve requirement, what would the Fed do in order to increase the money supply?

When using the reserve requirement, the Fed would lower the reserve requirements for banks, which would have banks place the extra cash income into circulation.