Unit 4: Banking, Expansion of Money Supply, Limited/Ample Reserve Policies

policy rate

the interest rate at which depository institutions lend reserve balances to each other overnight, set by central banks

federal funds rate

the US policy rate

money supply

the supply of currency and other liquid assets held within the US

liquidity

how easily an asset can be transferred into currency or sold for its cash value

m1

the sum of coin and paper money plus checking deposits and savings deposits

m2

m1 plus small-time deposits (ex CDs), money market mutual funds, and Eurodollar deposits

limited reserves

a banking system where central banks maintain a scarce supply of reserves to meet regulatory requirements

ample reserves

central bank supplies sufficient liquidity so that the federal funds rate is managed through administered rates rather than daily open market operations

required reserve ratio

the minimum percentage of customer deposits that commercial banks must hold in reserve and cannot lend out; to increase money supply, decrease this

discount rates

the interest banks pay to borrow money from the Fed; when low, banks are more likely to borrow from Fed; increase money supply by lowering this

open market operations

the fed’s purchase and sale of government securities

fractional reserve banking system

banking system in which only a fraction of total deposits is held on reserve and the rest is lent out

reserve ratio

the ratio of a bank’s reserves to its total deposits

balanced sheet / T account

lists a bank's assets (loans, reserves) and liabilities (deposits) to track money creation; two sides must always balance

assets

required reserves, excess reserves, and loans

libabilities

deposits and reserves that can be borrowed from the Fed

money creation

the generation of assets caused when an initial deposit to a bank is held partially in reserve and partially redistributed as a loan over and over again

money multiplier

1/required reserve ratio

interest on reserves

the Fed allows banks to earn interest on whatever they choose to hold in reserves

administered interest rates

rates set directly by central banks or governments, rather than determined by market supply and demand