Unit 13: federal reserve

What are the most important duties of the FRB?

- conduct the nation's monetary policy to promote maximum employment - promote a stable price environment, keeping inflation under control.

Banks that need additional capital to meet their reserve requirement may do what

Borrow money from fed reserve system. This is done thru a repurchase agreement

By selling securities, the fed pulls money out of the system,

Contracting the money supply and increasing rate

What is regulation T

Current initial deposit is 50% of the purchase price . This has been in place since 1974

What does increasing the money supply do?

Expand the economy and creates jobs, but if the economy expands too quickly (overheats) it may trigger high levels of inflation.

What is FOMC

Federal open market committee, meets regularly to direct the gifts open market operations.

What is monetary policy?

How the government regulates the amount of money in circulation. The amount of cash available in the US economy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.

What is the M1 money supply?

M1 is the measure of the most readily available $$ to spend: CASH, money in demand deposit accounts (DDAs), such as checking accounts. This is the $$ that is closest to being spent and turned into economic activity

One of the most important diagnostic tools for the FRB is the measures of money supply, know as

M1, M2, M3

Does FRB ever change the reserve requirement #?

No because changes have a dramatic impact through the banking system, hitting all the banks at once

What does buying securities do again?

Securities come out of the economy, and money goes in. The money supply goes up, interest rates go down, borrowing and spending for consumers is easier and the economy expands

What does selling securities do again

Securities go into the economy and money comes out. The money supply goes down and interest rates go up, borrowing and spending for consumers becomes more difficult and the economy contracts

What happens in a repurchase agreement

The Fed holds some of the bank's assets (usually loans the bank holds) as collateral for short term loan, usually overnight though some times longer. Tho increases the bank's cash reserves. *** the interest rate the Fed charges the bank is the discount rate**

What is the reserve requirement?

The amount a bank must maintain on deposit with FRB. Reserves dropping below this number indicate that the bank may have insufficient cash to meet depositor's demands.

What happens if FRB lowered the initial deposit requirement and allowed more borrowing?

The extra cash available would likely raise stock prices. This would result in more merger activity as well as investors using the additional wrath to make purchases, expanding the economy.

By buying securities, what happens

The fed pumps money into the banking system, expanding money supply and reducing rates

Broker call loan rate

The interest rate that banks charge BDs on money they borrow to lend to margin account customers.

As part of the FRBs regulatory authority, the Fed sets what ?

The minimum amount an investor must deposits when using credit to buy a security. Under Regulation T

In large measure, the supply and demand of money determines what?

The rate of interest that must be paid to borrow it

Federal funds rate

The rate that the commercial money center banks charge each other for overnight loans of $1M or more

The discount rate

The rate the FRB charged for short term loans to member banks. A decreasing rate indicates an easing of FRB policy and an increasing rate indicates a tightening of FRB policy

When the demand for money exceeds the supply, what happens to interest rates

They rise

What happens when FRB increase the amount required at purchase?

This would limit credit would slow the economy.

What is the easy money policy?

To expand credit during a recession to stimulate a slow economy : - buy US gift securities in open market -lower discount rate -lower reserve requirements

What is the right money policy

To tighten credit to slow economic expansion and prevent inflation - sell US govt securities in the open market -raise the discount rate -raise reserve requirements

Each bank sets its own prime rate which larger banks general setting a rate that other banks use or follow. True or false

True

When do banks lower their prime rate

When the FRB or Fed eases the money supply and they raise rates when the fed contracts the money supply

Prime rate

the interest rate that large US money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans.

What does the diagnostic tool do! And what does the active tool do?

"Read" the economy "Directly impact the economy"

The federal fund rates is also known as

A barometer of the direction of short term interest rates, which fluctuates constantly and can be considered the most volatile rate in the economy!!

The broker loan rate is usually what

A percentage point or so above other short term rates. Broker call loans are CALLABLE ON 24 hr notice

The discount rate is the ONLY rate of these four set by

A unit of the federal govt. the other three are set by the bank that is making the loan

The prime rate is set by A) individual banks. B) the Securities and Exchange Commission (SEC). C) the Federal Reserve Board (FRB). D) the Federal Open Market Committee (FOMC).

A) individual banks. The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans. Each bank sets its own prime rate.

Tighter credit will A) slow economic expansion, preventing inflation. B) stimulate the economy, fueling expansion. C) slow economic expansion, fueling inflation. D) stimulate the economy, preventing expansion.

A) slow economic expansion, preventing inflation. Tighter credit means that there is less money available to lend to consumers. Less money available to lend means less consumer spending, which will slow economic growth, and helps prevent or slow inflation.

A barometer of short-term interest rates and one that is therefore considered the most volatile interest rate in the U.S. economy is A) the federal funds rate. B) the broker call loan rate. C) the prime rate. D) the discount rate.

A) the federal funds rate.

What does the increase of reserve (cash) allow banks to do?

Allow banks to make more loans and effectively lower interest rates

What do margin accounts do

Allow customers to purchase securities without paying in full. The amount not paid is essentially loaned to the customer by banks and BDs

When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this A) stabilizes the money supply. B) increases the supply of money. C) decreases the money supply. D) is intended to hinder contraction of the money supply.

B) increases the supply of money. When the FOMC directs that Treasury securities be purchased in the open market, this increases the supply of money. Treasury securities are coming out of the economy and, therefore, money is going in—the money supply increases.

To tighten its monetary policy, making it more difficult for consumers to borrow money, the Federal Reserve Board (FRB) can A) raise the federal funds rate. B) raise the discount rate. C) lower the federal funds rate. D) lower the discount rate.

B) raise the discount rate. Wanting to tighten its monetary policy, which would make it harder for consumers to borrow money, the FRB can raise the discount rate—the rate it charges its member banks for short-term loans. This lessens the availability of money its member banks have to lend to consumers. The federal funds rate isn't a rate charged by the FRB but instead by large commercial banks to one another.

Considered the most volatile of the benchmark interest rates in the economy would be A) the discount rate. B) the federal funds rate. C) the broker call loan rate. D) the prime rate.

B) the federal funds rate. The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.

How does FRB influence the money supply?

By buying and selling US govt securities (T bills, notes, and bonds) in the open market. These actions will expand or contract the money supply, depending on which they are doing (buying or selling)

To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board (FRB) can A) raise the federal funds rate. B) raise the discount rate. C) lower the discount rate. D) lower the federal funds rate.

C) lower the discount rate. Wanting to ease its monetary policy, which would allow consumers to borrow more easily, the FRB can lower the discount rate—the rate it charges its member banks for short-term loans. This frees up more money for its member banks to lend to consumers. The federal funds rate isn't one charged by the FRB but instead by large commercial banks to one another.

The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically A) slightly below (a percentage point or so) other short-term lending rates. B) notably above (several percentage points) other short-term lending rates. C) slightly above (a percentage point or so) other short-term lending rates. D) notably below (several percentage points) other short-term lending rates. Explanation

C) slightly above (a percentage point or so) other short-term lending rates. The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates. LO 13.d

The broker loan rate is also known as

Call loan rate or call money rate

What is another word for reserve

Cash

What is the federal reserve system?

Central Bank of America, and sometimes just called federal reserve bank

Which of the following benchmark interest rates is considered a barometer of the direction of short-term interest rates? A) Federal funds rate B) Broker call loan rate C) Prime rate D) Discount rate

D) Discount rate The federal funds rate is the rate that commercial money center banks charge each other for overnight loans of $1 million or more. Overnight, representing the shortest of loans, makes this rate a good indicator of the direction short-term interest rates are taking.

When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this will do which of the following? A) Increase interest rates on loans to consumers B) Have no impact on lending rates to consumers C) Tighten the money supply D) Lower interest rates on loans to consumers

D) Lower interest rates on loans to consumers When the FOMC directs that Treasury securities be purchased in the open market, this will loosen the money supply; securities come out of the economy and money goes in to the economy. More money available lowers interest rates to consumers.

Where can demand deposits, checking accounts, paper currency and coins be found in the money supply? A) M1 only B) M2 only C) M1 and M3 only D) M1, M2, and M3

D) M1, M2, and M3 Demand deposits, checking accounts, paper currency, and coins are a part of M1 in the money supply. However, consider that M2 contains all of M1, and M3 contains all of M2 and M1; therefore, one should recognize that these components are found in each of them: M1, M2, and M3,

Who DIRECTS the federal reserve system?

Federal reserve board (FRB)

How many prominent interest rates are there

Four. -federal funds rate -prime rate -broker call loan rate -the discount rate

Consumers ability to borrow lower interest rates helps fuel what

Helps fuel the economy toward because consumers are now in a position to purchase more goods and services.

The cost of money is called

Interest

When the money available for loans exceeds demand, what happens to interest rates

Interest rates fall

When Fed wants to contract (tighten) the money supply, what happens

It SELLS securities to banks. No cash comes out of the respective banks (to pay for securities) and the securities go in as each sale is charged against a bank's reserve (cash) balance This reduces the banks ability to lend money, which tightens credit and effectively raises interest rates

When the Fed wants to expand (loosen) the money supply, what does it do?

It buys securities from banks. The securities come out of the economy, and money goes into the economy through the bank

What happens when FED raises discount rate?

Lift interest rates throughout the economy, lowering the discount rate tends to cause rates to drop

What happens when the reserve requirement is lowered

Lowering this number frees up cash at the banks to fund loan activity, expanding the economy.

What is the M2 money supply?

M2 consists of M1 + "consumer savings deposits". Those assets that are easily move to a DDA (checking acct) and spent. Among the consumer savings deposits are savings accts, retail (non-negotiable) CDs, money market funds, and overnight repurchase agreements. Remember, M1 is also part of M2

What is M3 money supply

M3 consists of M2 + "large time deposits. Those assets that are a bit harder to move into a DDA and be spent. Examples are negotiable (jumbo) CDs and multi-way repurchase agreements. M2 is part of M3 so by extension is M1 because it is part of M2

What happens when the reserve requirement is raised?

Raising this number decreases the amount available for loans.

High inflation is hard on the consumer. True or false

True.