ECO 001 Lecture Notes - Lecture 9: Fractional-Reserve Banking, Federal Funds Rate

The Federal Reserve took money out of the banking system to raise the federal funds rate-the rate at which banks lend each other money overnight-from 4 percent to 4.5 percent.

a. How does the Fed take money out of the banking system?

b. Explain how doing so would raise the federal funds rate.

(Make sure you explain your responses.)

why is a fractional reserve banking system so unstable? Describe two ways in which government regulation has made the fractional reserve banking system possible. Make sure you explain how the fractional reserve system is brought about. Also, how would a complete free market with regard to the monetary and banking system (i.e., no government fiat money, no Federal Reserve, no Federal Deposit Insurance Corporation, and no regulations of the banking and monetary system whatsoever) eliminate the fractional reserve banking system? Finally, how does the government directly and indirectly create inflation?

1. Answer True or False for each of the following.

Alan Greenspan is the current chair of the Federal Reserve Board.

The Fed rarely changes the required reserve rate.

The FOMC is the policy making arm of the Federal Reserve.

When the Federal reserve buys securities it raises the money supply.

Holding money in the expectation of better future investments is known as the precautionary demand for money

2. Identify for each of the following whether the actual multiplier in the banking system is rising or falling?

Banks increase their reserves beyond what is necessary.

The Federal Reserve lowers the target Fed Funds rate.

Households hoard currency more than before.

The Federal Reserve raises the Required Reserve Rate.

Currency increasingly disappears into the underground economy or overseas.

The Federal Reserve sells bonds.