Interest & Banking Final Exam Review

How many regional Federal Reserve Banks are there?

12

How many members are in the Reserve Banks’ board of directors and how many do member banks select?

There are nine total members and member banks select six of the nine members which gives some influence to banks over how Reserve Banks are run

How is the economic power within the Federal Reserve System divided?

1. among bankers and business interests

2. among states and regions

3. between government and the private sector

What are the four groups within the Federal Reserve System?

1. Federal reserve banks

2. private commercial member banks

3. the board of governors

4. the federal open market committee (FOMC)

What are the 3 groups of interest that directors represent in the federal reserve?

1. Banks

2. Businesses

3. The general public

What are some of the functions of district banks?

1. manage check clearing in the payments system

2. manage currency in circulation

3. conduct discount lending

4. perform supervisory and regulatory functions

5. collecting and making available data on business activities

6. serve on FOMC

What policy does the federal reserve district banks engage in and who sets the discount rate?

1. Monetary policy- directly through open market operations

2. in recent decades, the discount rate has been set by the board of governors in Washington DC

What percent of state banks/all banks are members of the F.R.S?

20% of state banks and about 1/3 of all banks

What/who is the board of governors?

The governing board of the F.R.S, consisting of 7 members appointed by president

-serve 14 year nonrenewable terms

What are some of the duties of the board of governors?

1. administer monetary policy

2. influences the setting of guidelines for open market operations

3. informally influence national/international policy decisions

4. is responsible for some financial regulation (ex; setting margin requirements)

5. exercises administrative controls over individual federal reserve

FOMC

the 12 member federal reserve committee that directs open market operations

• consists of the chair of the board of governors, the other Fed governors, the president of the federal reserve bank of New York, and the presidents of four of the other 11 federal reserve banks

  • only 5 federal reserve bank presidents are voting members of the FOMC

Prior to each meeting, FOMC members access data from 3 books:

1. green book: national economic forecast for the next 2 years

2. blue book: projections for monetary aggregates

3. beige book: summaries of economic conditions in each district

What does the FOMC do?

sets a target for the federal funds rate by buying and selling treasury securities to adjust the level of bank reserves

issues a domestic policy directive to the Fed’s trading desk at the New York Fed

what is principal agent view?

a theory of central bank decision making that holds that officials maximize their personal well being rather than that of the general public

who owns the federal reserve banks?

the private commercial banks in each district which are members of the FR system

The federal reserve district banks

engage in monetary policy directly through discount lending

The discount window is

the means by which the Fed makes discount loans to banks

the bank lending channel of monetary policy transmission is through

the amount of bank reserves

which of the following is not a responsibility of the board of governors?

carrying out open market operations

which of the following is a liability of the fed?

currency in circulation

vault cash is a(n)..

liability of the fed and is counted as reserves

reserves equal

deposits with the fed plus vault cash

the primary assets of the fed are..

discount loans and government securities

if the fed makes a discount loan of $2 million to a commercial bank, the Fed’s balance sheet will show..

an increase in discount loans of $2 million and an increase in bank reserves of $2 million

what is the function of the federal reserve

responsible for controlling the money supply and regulating the banking system

banking system

creates the checking accounts that are a major component of M1

what is monetary base?

= currency in circulation + reserves

what are the 3 groups that determine the money supply?

the fed, the nonbank public, and the banking system

the federal reserves balance sheet

assets: U.S government securities, discount loans to banks

liabilities: currency in circulation, reserves of banks

currency in M1

currency held by the nonbank public

currency in M1 = currency in circulation - vault cashb

bank reserves

bank deposits with the fed + vault cash

discount loans

an increase in discount loans affects both sides of the feds balance sheet

• 1 million of discount loans increases bank reserves and the monetary base by 1 million

what are the six monetary policy goals?

1. price stability

2. high employment

3. economic growth

4. stability of financial markets and institutions

5. interest-rate stability

6. foreign exchange market stability

what is the Fed’s dual mandate

price stability and high employment

what are the feds three traditional policy tools?

1. open market operations

2. discount policy

3. reserve requirements

how are federal funds rate determined?

by the demand and supply for reserves in the federal funds market

what is quantitative easing?

a central bank policy whose goal is to stimulate the economy by buying long-term securities

what are the monetary policy transmission channels?

1. bank lending channel

2. collateral channel

3. deposit market power channel

When the Federal Reserve buys government securities, the money supply tends to:

increase

the federal funds rate is..

the rate banks charge each other for overnight loans of reserves

required reserves are:

total deposits multiplied by the reserve requirement

The main purpose of reserve requirements is to:

control the money multiplier

Open market sales of securities by the Fed will:

decrease reserves and raise interest rates

The interest rate the Fed pays on reserves held by banks is called:

Interest on reserve balances (IORB)

If the Fed lowers the discount rate, banks are more likely to:

borrow from the Fed

The money multiplier becomes smaller when:

the reserve requirement increases

what is money multiplier?

the amount of money that the banking system can generate with each dollar of reserves

which of the following best describes the credit channel of monetary policy transmission?

monetary policy affects bank lending ability

an open market purchase will cause the Fed’s balance sheet to show:

an increase in securities and increase in reserves

if the Fed wants to reduce inflation it will likely:

raise reserve requirements

when banks borrow from the fed, the loan appears as a(n):

liability for the bank and asset for the fed

which part of the Fed sets the target federal funds rate?

FOMC

The Feds dual mandate includes:

low inflation and maximum employment

if the Fed increases the interest rate on reserve balances (IORB) banks will likely:

increase reserve holdings