SIE unit 13 The Federal Reserve

What are the two main jobs of the Federal Reserve Board (FRB)

- Conduct the nations monetary policy to promote maximum employment - Promote stable price environment, keeping inflation under control

What happens when you increase the money supply?

- Expands the economy and creates jobs, but if it expands too quickly (overheat) it leads to high levels of inflation

What happens if you raise or lower the discount rate?

- If the FRB raises the discount rate lifts interest rates - If the FRB lowers the discount rate it lowers interest rates

When is the a Prime rate adjusted?

Banks typically lower their prime rate when the FRB eases the money supply, and they raise rates when they feds contract the money supply.

What is M3 (Measure of Money Supply)?

Consists of M2 plus large time deposits: negotiable (jumbo) CD's and multi day repurchase agreements.

What is M2 (Measure of Money Supply)?

It consists of M1 plus consumer saving deposits: savings accounts, retail (non-negotiable) CD's, money market funds, and overnight repurchase agreements.

How can the FRB influence the money supply in the Open Market?

The FRB acting as an agent can by and sell U.S government securities in the Open Market. - If they want to expand it buys securities from banks (lower interest rates) - if they want to contract they sell securities to banks (higher interest rates)

Who is in charge of the Federal Reserve System?

The Federal Reserve Board (FRB)

What is the Federal Reserve Requirement?

The amount a bank must maintain on deposit with the Federal Reserve. - Lowering the number frees up cash expanding the economy - Raising the number decreases amount for loans.

What is the Federal Reserve?

The centeral bank if the United States.

What is a repurchase agreement?

The feds will hold a banks assets as collateral for a short term loan. This provides the bank with cash reserves.

What is the cost of money called?

The interest rate

What is the Broker Call Loan Rate?

The interest rate that banks charge BD's on money they borrow to lend to margin account customers. Also known as the call loan rate or call money rate. Usually a percentage point above other short term rates.

What is M1 (Measure of Money Supply)?

The measure of the most readily available money to spend: cash, coinage, money in demand deposit accounts. This money is close to being turned into economic activity.

What is the Prime Rate?

The prime rate is the interest rate that large US money center commercial banks charges their most creditworthy corporate borrowers for unsecured loans.

What is Regulation T?

This is the minimum amount an investor must deposit when using credit to buy a security (50%). If lowered more borrowing and extra cash available would likely raise stock prices vis versa.

What is the Federal Funds Rate? How is it described?

This is the rate that commercial money center banks charge each other for overnight loans of $1 mill or more. -Barometer of short term interest - Considered most volatile rate in economy

Describe the relationship of supply and demand of money and interest rates

When money available for loans exceeds demand interest rates fall; when the demand for money exceeds the supply interest rates rise.

What is the discount rate?

the minimum interest rate set by the Federal Reserve for lending to other banks.