Chapter 14
A change in reserve requirement causes a change in
-Excess Reserves -The money Multiplier -The lending capacity of the banking system these changes sharply reduce bank lending power
The Feds control of the money supply is exercised by the use of three policy tools:
-Reserve requirements -Discount Rates -Open Market Rates
Recall the banks systems ability to make additional loans-create deposits- is determined by two factors:
1) The amount of excess reserve banks hold 2) The money multiplier. Both are directly influenced by the Fad`s required reserve ratio
How many branches are in the fed, how many governors?
3 Branches: Board of Governors (7 members), Federal Reserve banks (12 banks with 25 branches), Private banks (depository institutions).
Fed funds rate
A visible signal of Federal Reserve open market operations
Sale Of securities
Banks use some of their excess reserve to buy government bonds
The Fed can decrease the federal funds rate by
Buying government bonds, which causes market interest rates to fall.
By raising or lowering the discount rate the fed
Charges the cost of money for banks and therewith the incentive to borrow reserves
Reserves the fed lends to banks has a rate of interest
Discount rate
The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the
Discount rate.
Open Market Operations
Entail the purchase and sale of government securities (bonds) for the purpose of altering the flow of reserves into and out of the banking system
A Bond
Is a piece of paper certifying that someone has borrowed money and promises to pay it back at some future date IOU
Which of the following is true about an increase in the discount rate?
It signals the Federal Reserve's desire to restrain money growth.
Currency held by the public plus balances in transactions accounts plus travelers checks is the definition of
M1
The federal Reserve systems control over the supply of money is the key mechanism of the __________ policy
Monetary
The federal funds rate is the interest rate charged when
One bank lends reserves to another bank.
Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?
Open market operations.
The minimum amount of reserves a bank is required to hold is
Required reserves.
Required Reserves=
Required reserves= Required reserve ratio x Toal Deposits
A growing economy needs a
Steadily increasing supply of money to finance market exchanges.
Which of the following is responsible for the Fed's daily activity in financial markets?
The FOMC.
Discounting
The Fed is lending reserves directly to private banks
The Federal Open Market Committee is responsible for
The Fed's daily activity in financial markets.
What is the FOMC responsible for?
The Fed`s daily activity in finacial markets.
Buying bonds
The fed increases bank reserves
Federal Fund rate
The interest rate for inter reserve loans
Money Multiplier
The number of deposit (loan) dollars that the banking system can create from $1 of excess reserves; equal to 1/ required reserve ratio
Terms and who is in charge of appointing and confirming
The president appoints the chairman, who serves as board chairman for 7 years. Governors in general only have 14 year terms in which they cant not be reappointed
Which of the following is not true for members of the Federal Reserve Board of Governors?
They usually serve two or three terms.
Which of the following represents the lending capacity of an individual (nonmonopoly) bank?
Total reserves - required reserves.
Excess Reserves=
Total reserves-Required reserves
The money supply (M1) includes currency held by the public plus
Transactions accounts plus travelers checks.
The Fed is most likely to pursue
Use of open market operations as the primary mechanism to change reserves.
reserves borrowed by one bank from another are referred to as "federal funds"
and are lent for short periods
The interest rate that the federal banks charge on loans they grant to private banks is called the
discount rate
By changing the reserve requirements....
the Fed can directly alter the lending of the banking system.
The Fed can use all of the following except ____________ to change the lending capacity of the banking system.
the excess reserve requirement
selling bonds
the fed reduces bank reserves
The rate of the return of a bond is the
yeild
