FIN 3080- CH 4, Federal Reserve and Monetary Policy

Money supply

cash (currency) in circulation plus checking account balances

Which actions by commercial banks increase the money supply?

1) Making loans and 2) Buying assets from depositors (securities such as T-Bills)

What are the four major functions of the Federal Reserve System?

1) Conduct monetary policy

2) Supervise and regulate depository institutions

3) Maintain stability of financial system

4) Provide payment and other financial services

Fed's Dual Mandate seeks to balance...

Employment and inflation (stable prices)

Which Fed function works to prevent crises in the economy?

Supervise and regulate depository institutions

Which Fed function involves acting as a "lender of last resort"?

Maintain stability of financial system

What are the three main components of the Federal Reserve System?

1) Federal Reserve Banks

2) Board of Governors

3) Federal Open Market Committee

How many Federal Reserve Banks are there?

12

How is the Board of Governors organized?

7 members, appointed by the President and confirmed by the Senate

What are the special responsibilities of the Fed Board Chair?

Spokesperson, reports to Congress, advisor to President, oversees staff, sets agenda. Tradition is that governors do not dissent from Chair's position unless the strongly disagree

How is the Federal Open Market Committee (FOMC) organized?

Consists of 12 members: 7 members of Board of Governors, President of Federal Reserve Bank of New York, 4 Presidents of other Federal Reserve Banks (rotating basis)

What is on the liabilities side of the Fed's balance sheet

Deposits and currency

What is on the asset side of the Fed's balance sheet?

Treasuries, other securities, and loans to banks

Federal Funds Rate

Interest rate on short-term funds transferred between financial institutions, usually for a period of one day

Open market operations

Purchases and sales of US government and federal agency securities by the Federal Reserve.

Discount rate

Rate of interest Federal Reserve Banks charge on loans to financial institutions in their district

Reserve requirements (reserve ratios)

The portion of reserves the Federal Reserve requires banks to hold. Commercial banks are required to hold reserves (cash in vault or deposits at FRBs) to back transaction deposit accounts

Interest On Excess Reserves (IOER)

Interest paid by the Fed to commercial banks on excess reserves

This discourages banks from lending below a rate, and effectively sets a floor for the federal funds rate

Quantitative Easing

Buying long-term Treasuries and mortgage backed securities