Ch. 11 Fed Reserve

Federal Funds

- Excess Funds deposited by commercial banks at Federal Reserve Banks - Funds which are in Excess of Reserve Requirements

Federal Open Market Committee (FOMC) chief functions are:

1. Open Market Operations 2. Changing the primary reserve requirement maintained by bank members 3. Changing the discount rate 4. Changing the margin required by broker dealers (least effective tool) 5. Moral Suasion- tries to influence of persuade member banks to adopt certain policies rather than mandate change thru regulation

To implement a tight money policy, the Fed would?

1. Sell treasuries on the open market 2. Raise the discount rate 3. Raise the reserve requirement of member banks All of the actions would decrease the excess reserves

To implement an easy money policy the Fed would ?

1.Buy Treasuries on the Open Market 2. Reduce the Discount Rate 3. Lower the Reserve Requirement of Member Banks ALL would Increase Excess Reserves

Interbank Market

An unregulated, decentralized global market which trades currencies and debt obligations - Eurobonds

LIBOR

London Interbank Offered Rate Average rate that international banks charge each other (floating rate)

Capital Market

Long term debt and equity securities

IRS

a bureau of the DOT and is charged with collecting federal taxes - personal and corporate

Prime rate

interest rate charged and set by commercial banks on loans to their credit worthy commercial customers

Which of the following is true regarding the Inter-bank Market? [A] It is the market for federal funds between banks. [B] It helps establish the spot rate for foreign currencies. [C] It administers loans to foreign countries. [D] It is the guarantor of foreign currency options.

B EXPLANATION The Interbank market is an unregulated, decentralized market which trades currencies and debt obligations such as Eurobonds. It does not administer loans or guarantee foreign currency options.

If the Federal Reserve buys government securities in the open market, which of the following will normally occur? Bond prices will increase. Bond prices will decrease. Yields will increase. Yields will decrease. (A) I and III (B) II and IV (C) II and III (D) I and IV

D Buying government securities in the open market allows the Federal Reserve to increase the supply of money in circulation. This usually pushes interest rates down, causing bond prices to increase. I and IV are correct.

Which of the following are true of the Inter-Bank Market? It is a decentralized market. It is essentially free from government regulation. Governments may take actions that affect their own currencies. Trading is generally conducted in large units. [A] I and II [B] III and IV [C] II, III and IV [D] All

D EXPLANATION All of these are true. While individual governments can take actions that affect their own currency, the Inter-Bank Market itself is free from government regulation.

Banker's Acceptances

Drafts or bills of exchange which become money market instruments

Monetary Policy

Fed reserve regulates flow of money and credit in the economy

Money Market

Short term debt instruments with maturities of 12 months or less and highly liquid

Repurchase Agreements

agreements to repurchase U.S Gov securities at a fixed price usually on an overnight transaction

Commercial paper

an unsecured promissory note of corps; best way for a corp to raise short term funds

Eurodollars

deposits in U.S. dollars that have been deposited with baks outside the U.S.

call loan rate

rate at which broker- dealers borrow from banks to cover margin loans to customers

discount rate

rate charged by the federal reserve to banks

Federal funds rate

rate that banks charge each other for overnight loans

Federal reserve

the central bank of the United States; regulates all U.S. banks - conducts the nations monetary policy - promotes stability of the financial system - monitors the soundness of financial institutions & their potential risk to the economy - promotes consumer protection & community development

U.S. Department of the Treasury

the executive agency that is responsible for promoting economic prosperity and ensuring the financial security of the U.S.