ECON 2002.01 - Chapter 12 (Money Creation and the Federal Reserve)

reserve ratio

the percentage of a bank's total deposits that are held in reserves

reserve requirement

the required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits

fractional reserve banking system

describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process

excess reserves

reserves held by banks above the legally required amount

money multiplier

a formula that measures the potential or maximum amount the money supply can increase (or decrease) when a dollar of new deposits enters or exits the system and is defined as 1/the reserve requirement

money leakages

a reduction in the amount of money that is used for lending that reduces the money multiplier. it is caused by banks choosing to hold excess reserves and from individuals , businesses, and foreigner choosing to hold cash`

Federal Reserve System

the central bank of the United States

Federal Open Market Committee (FOMC)

a twelve-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. it oversees open market operations (the buying and selling of government securities), the main tool of monetary policy

federal funds rate

the interest rate financial institutions charge each other for overnight loans used as reserves

discount rate

the interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank

open market operations

the buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system

insolvent

a situation when a bank's liabilities exceed its assets