The Federal Reserve System

These flashcards cover key concepts about the Federal Reserve System, including its structure, tools, functions, and impacts on the economy.

What year was the Federal Reserve created?

The Federal Reserve was created in 1913.

What are the three major tools the Fed uses to control the money supply?

Reserve requirements, discount rates, and open market operations.

Which committee is responsible for the Fed's daily activity in financial markets?

The Federal Open Market Committee (FOMC).

How many members are on the Fed Board of Governors?

There are 7 members on the Fed Board of Governors.

What happens when the Fed raises the discount rate?

Borrowing reserves from the Fed becomes more expensive, leading to fewer loans being made, which decreases the money supply.

What is the role of private banks concerning reserve requirements?

Private banks must keep a fraction of deposits in reserve and cannot loan out these required reserves.

What is the relationship between the Fed's actions and the money supply during open market operations?

When the Fed buys bonds, the money supply grows; when it sells bonds, the money supply shrinks.

What is quantitative easing (QE)?

A monetary policy where the Fed buys long-term bonds and mortgage-backed securities to inject reserves into the banking system.

What does the yield on a bond represent?

The yield represents the rate of return on the bond, calculated as annual interest payment divided by the price paid for the bond.

What influence does the Federal Reserve have on the bond market?

The Fed can alter the attractiveness of bonds by buying or selling them at different prices, thus changing their yields.