ECON 1202 Lecture Notes - Lecture 27: Bank Reserves, Money Supply, Reserve Requirement

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ECON 1202 Lecture Notes - Lecture 26: Policy Review, Aggregate Demand, Aggregate Supply

ECON 1202 Lecture Notes - Lecture 27: Bank Reserves, Money Supply, Reserve Requirement

ECON 1202 Lecture Notes - Lecture 28: United States Treasury Security, Business Cycle, Aggregate Demand

Money and Banking

FOMC (where monetary policy is formulated)

•7 members of the board of governors"

•5 of the 12 regional bank presidents"

•Meets every 6 weeks"

•Discusses the health of the economy"

•Consider and determine changes in monetary policy "

What does the Federal Reserve do?"

•Job is to regulate banks"

•Ensures the ﬁnancial health and stability of the banking system and the

overall economy"

Speciﬁcally

•Acts as a Lender of Last Resort

•Makes loans to banks to pay oﬀ depositors"

•helps to make people conﬁdent in being able to receive their money

and prevents the panic "

•Commercial Banker’s Bank

•facilities bank transactions"

•provides check clearing services "

•Regulates banks

From Our Perspective"

•They are responsible for controlling our overall money supply and short

term interest rates in implementing monetary policy

Other Bank Regulations"

•Capital requirements"

•deposit insurance"

•lending practices"

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What is US Monetary Policy

•purposeful control of money supply and interest rates to achieve price

stability and full employment

•Dual Mandate

•controls inﬂation and keep unemployment low"

•these conﬂicts sometimes, which creates balancing act federal reserve

has to engage in "

•Connected: Economic growth and Financial Market Stability

Tools: How is it that MP is conducted?"

•Open Market Operations

•buying and selling of bonds/treasury securities in the open market"

•to increase money supply, Fed directs its trading desk in NY to buy

US treasury securities (bonds)

•to decrease the money supply, the Fed sells its securities (bonds)

Buying of Bonds… "

•increases the overall banking reserve (liquidity of bank)"

•central bank can print money (federal reserve)"

•overall banking reserve increases which increases nations money supply

as well"

•reserves in banking system is referred to as monetary base"

Big Idea"

•sell bonds: fed is decreasing overall banking reserve

•Fed withdrawing dough when others buy bonds from the Fed"

•money supply decreases"

•buying bonds: fed is increasing reserve and increasing money supply

•Discount Rate Policy

•interest rates paid on reserves money banks borrow from the Fed on a

short term basis"

•by decreasing or increasing the discount rate, the Fed encourages or

discourages banks to borrow more money from the Fed"

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•Fed directly controls the discount rate"

•discount rate = rate of interests that Feds charges to banks (discount

rate federal reserve directly controls)"

Federal Funds Rate"

•rate of interest that that banks charge to each other for overnight funds

to cover reserve requirements"

•Federal reserve indirectly controls this rate"

•aﬀects overall interest in economy"

•federal funds rate and open market operations have a direct relationship "

•foundational rate"

•sets ﬂoor on overall rates"

•alteration of those rates, alters overall structure"

Big Idea:

It is through the Fed’s open market operations and adjustment of the

banking reserves, that the Fed is able to nudge or target the federal funds

rate"

•buying bonds, nudges/lowers rate"

•setting it lower"

•selling bonds (taking reserves out of system), nudges/raises rates"

WSJ Article: Fed oﬃcials contemplate thresholds for rate cuts

•conditions to cut interest rates"

•Reserve Requirements

•US banking is a fractional reserve banking system: when banks get

money from us, (we put money into our bank account, the bank is

borrowing money from us), they only have to keep a fraction in reserve

and they can lend out the rest (that is how they make their dough!)"

•borrow at low rate of interest and lend it out at a higher rate "

•what they lend out, exceeds the amount of reserves they actually

hold"

•only have to keep a portion of what we deposited in their reserves "

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Document Summary

Fomc (where monetary policy is formulated: 7 members of the board of governors, 5 of the 12 regional bank presidents, meets every 6 weeks, discusses the health of the economy, consider and determine changes in monetary policy. What does the federal reserve do: job is to regulate banks, ensures the nancial health and stability of the banking system and the overall economy. From our perspective: they are responsible for controlling our overall money supply and short term interest rates in implementing monetary policy. Other bank regulations: capital requirements, deposit insurance, lending practices. Tools: how is it that mp is conducted: open market operations, buying and selling of bonds/treasury securities in the open market, to increase money supply, fed directs its trading desk in ny to buy. Us treasury securities (bonds: to decrease the money supply, the fed sells its securities (bonds)

Related Questions

QUESTION 31

The Board of Governors of the Federal Reserve System is

		composed of seven members who are appointed by the President and approved by the Senate.
		composed of 12 members of the Senate and the U.S. House of Representatives.
		elected by the general public.
		composed of representatives from the country's 12 largest commercial banks.

1.11 points

QUESTION 32

The Fed is said to be the "lender of last resort" in that

		it charges a higher interest rate to borrowers than does any other bank.
		it functions as the government's bank only when commercial banks fail to do so.
		it makes loans to individuals whom commercial banks do not believe are credit-worthy.
		it stands ready to lend to any depository institution that it has decided should not fail.

1.11 points

QUESTION 33

The Federal Reserve System acts as the government's fiscal agent by

		providing checking account services for the government.
		preparing the budget the President presents to Congress every year.
		determining how to finance a deficit.
		auditing taxpayers.

1.11 points

QUESTION 34

The Federal Reserve System was established in which year?

		1913.
		1929.
		1865.
		1941.

1.11 points

QUESTION 35

By serving as the lender of last resort,

		the Fed provides check clearing services.
		the Fed aids in the sale of government securities.
		the Fed supervises depository institutions.
		the Fed can prevent bank failures.

1.11 points

QUESTION 36

Depository institutions must

		use and pay for the services of the Federal Reserve System.
		set their interest rates according to schedules established by the Federal Reserve System.
		keep a certain percentage of their deposits as reserves.
		turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed.

1.11 points

QUESTION 37

The Federal Reserve System has

		50 district banks.
		24 district banks.
		12 district banks.
		7 district banks.

1.11 points

QUESTION 38

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is

		the Board of Governors.
		the Federal Advisory Committee.
		the Federal Open Market Committee.
		the Federal Reserve district banks.

1.11 points

QUESTION 39

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a

		systemic risk.
		liquidity risk.
		lending risk.
		moral hazard.

1.11 points

QUESTION 40

A system in which depository institutions hold reserves that are less than the amount of total deposits is called

		fiat money banking.
		required reserve banking.
		fractional reserve banking.
		central banking system.

1.11 points

QUESTION 41

Total reserves of private banks are

		all customer deposits.
		the minimum amount banks need to hold against time deposits.
		federal reserve notes.
		deposits held at the Fed and vault cash.

1.11 points

QUESTION 42

A statement of assets and liabilities of any business entity is called

		a cash flow statement.
		an income statement.
		a balance sheet.
		a statement of net worth.

1.11 points

QUESTION 43

Which of the following actions has no effect on the total money supply?

		The Federal Open Market Committee buys government securities.
		There is a transfer of deposits from one bank to another bank.
		There is change in the money multiplier.
		The Federal Open Market Committee sells government securities.

1.11 points

QUESTION 44

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

		$80.
		$0.
		$400.
		$20.

1.11 points

QUESTION 45

The Federal Open Market Committee has responsibility for

		appointing members to the Board of Governors of the Federal Reserve system.
		issuing orders to buy or sell government securities for the Fed.
		advising the Treasury Department on monetary policy.
		printing money.

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Each Federal Reserve Bank is

Answer

		a corporation.
		a government owned enterprise.
		a government subsidized entity.
		a government-sponsored enterprise.

A transaction in which the Fed agrees to buy a security one day and sell it back the next day is

Answer

		an overnight securitization operation.
		a repurchase agreement.
		a legal tender.
		a rebate sale.

The Federal Reserve document that states the goals of the FOMC and the target for the federal funds rate is known as the

Answer

		Directive.
		Beige book.
		Bluebook.
		Green book.

How long is the normal term in office for a Governor of the Federal Reserve Board?

Answer

		Five years
		Seven years
		Fourteen years
		Life

The federal funds rate is the interest rate on

Answer

		loans to banks from the Fed.
		loans by banks to the Fed.
		short-term loans between banks.
		Treasury bills.

Expenditures of each Federal Reserve Bank are approved by

Answer

		the U.S. Senate.
		the President of the United States.
		the U.S. Treasury Department.
		the Federal Reserve Board of Governors.

Federal Reserve Banks pay for their central banking operations through

Answer

		government tax revenue.
		interest on the securities they own.
		fees charged to banks that use their services.
		dividends paid by local banks.

When the Fed engages in open-market operations, the transactions are conducted by

Answer

		the Open Market Desk at the Federal Reserve Bank of New York.
		the Open Market Desk at the Federal Reserve Board in Washington, D.C.
		the National Bureau of Economic Research.
		the Federal Open Market Committee.

In 2006, Chairman Greenspan left the Fed because

Answer

		President Bush wanted him to resign.
		he reached mandatory retirement age.
		his term as Governor expired.
		his term as Chairman expired.

The Federal Reserve publication that discusses forecasts for the economy is known as the

Answer

		Redbook.
		Beigebook.
		Bluebook.
		Greenbook.

The FOMC directive

Answer

		describes forecasts for the economy.
		states the target for the federal funds rate.
		discusses the regional economies around the country.
		shows the Fed's balance sheet.

The chairman of the Federal Reserve Board who reduced the inflation rate from over 10 percent to about 3 percent in the early 1980s was

Answer

		Arthur Burns.
		G. William Miller.
		Paul Volcker.
		Alan Greenspan.

Which Fed chairman ensured the independence of the Federal Reserve in the 1950s?

Answer

		William McChesney Martin
		Arthur Burns
		Paul Volcker
		G. William Miller

There are ____ Federal Reserve Banks.

Answer

		seven
		ten
		twelve
		fifteen

Purchases and sales of government securities in the secondary market are known as

Answer

		discount borrowing and lending.
		federal funds purchases and sales.
		discounting.
		open-market operations.

The monetary base can be divided into

Answer

		currency plus transactions deposits.
		vault cash plus reserves held at the Fed.
		required clearing balances plus currency.
		reserves plus currency.

The Fed does not generally change reserve requirements to affect the money supply because

Answer

		the impact is too large.
		the Fed needs the approval of Congress to do so.
		it's not legal for the Fed to do so.
		the Fed needs the approval of the President of the United States to do so.

The Fed has decided to tighten monetary policy, so it decreases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		reduced discount loans for profit.
		reduced discount loans for business needs.

A haircut is

Answer

		the extra collateral the Fed requires above the value of a discount loan.
		the extra principal a commercial bank requires the Fed to pay when making a discount loan.
		the difference between what an investor pays for a bond and what the investor sells the bond for.
		expected personal grooming for a member of the Board of Governors.

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The extra collateral the Fed requires above the value of a discount loan is known as

Answer

		the term premium.
		a haircut.
		a covenant.
		secondary credit.

Currency held by the nonbank public plus banks' reserves equals

Answer

		the Fed's capital stock.
		discount loans.
		the monetary base.
		required clearing balances.

The money supply divided by the monetary base equals

Answer

		the reserve ratio.
		velocity.
		high-powered money.
		the money multiplier.

The main liability on the Federal Reserve's balance sheet is

Answer

		discount loans.
		securities.
		monetary base.
		capital.

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan. Such a loan is known as

Answer

		a no documentation discount loan.
		a haircut.
		a covenant.
		a primary credit discount loan.

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

Answer

		federal funds rate decreases.
		primary credit discount rate decreases.
		primary credit discount rate increases.
		federal funds rate increases.

In November and December, people use more currency than usual, so the Fed increases the money supply through

Answer

		defensive open-market operations.
		dynamic open-market operations.
		discount loans for profit.
		discount loans for business needs.

Reserves held by banks at the Fed that earn implicit interest payments in the form of earnings credits for Fed services are known as

Answer

		required clearing balances.
		reserve requirements.
		excess reserves.
		non-transaction deposits.

Required clearing balances

Answer

		pay interest in the form of earnings credits.
		count as reserves and can be used to meet reserve requirements.
		pay interest equal to the federal funds rate minus one percent.
		are required to be held against transactions deposits.

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Assets are

Select one:

a. legal reserves.

b. the same as net worth.

c. cash a bank owes to depositors.

d. properties, possessions, and claims on others.

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In the short run, an increase in the money supply results in

Select one:

a. economic expansion.

b. higher interest rates.

c. lower interest rates.

d. increased consumer spending.

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The Federal Reserve

Select one:

a. is made up of 12 district banks and 25 branch banks.

b. was established in 1930s.

c. is managed by a 12-member board of directors.

d. is made up of district banks that operate independently from one another.

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The Feds Federal Open Market Committee

Select one:

a. advises the Fed on the overall health of the economy.

b. is the Feds primary monetary policymaking body.

c. regulates savings and loan associations, savings banks, and credit unions.

d. advises the Fed on consumer credit laws.

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The nations monetary policy

Select one:

a. is determined by the Council of Economic Advisers.

b. almost always complements presidential and Congressional aims.

c. is tightly managed by Congress.

d. often comes under attack from politicians.

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ECON 1202 Lecture Notes - Lecture 27: Bank Reserves, Money Supply, Reserve Requirement

ECON 1202 Lecture Notes - Lecture 26: Policy Review, Aggregate Demand, Aggregate Supply

ECON 1202 Lecture Notes - Lecture 27: Bank Reserves, Money Supply, Reserve Requirement

ECON 1202 Lecture Notes - Lecture 28: United States Treasury Security, Business Cycle, Aggregate Demand

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