The Federal Reserve and Commercial Banks

This set of flashcards covers key vocabulary terms and definitions related to the role of the Federal Reserve and commercial banks in the economy.

Federal Reserve

The central bank of the United States responsible for setting monetary policy, regulating banks, and serving as a lender of last resort.

Monetary Policy

The process by which the Federal Reserve controls the supply of money and interest rates in the economy.

Commercial Banks

Financial institutions that accept deposits, make loans, and provide financial services to consumers and businesses.

Asset

Something owned that has future value, such as a loan for a bank, which represents a promise of future cash flow.

Spread

The difference between the interest rate charged for loans and the interest rate paid for deposits by banks.

Reserve Accounts

Deposits that every commercial bank holds at the Federal Reserve used to settle payments between banks.

Reserve Requirements

Minimum reserves that banks must hold, set by the Federal Reserve.

Liquidity

The availability of liquid assets to a bank, affecting its ability to borrow from other banks or the Federal Reserve.

Monetary Policy Transmission

The process through which changes in the federal funds rate affect loan and deposit interest rates throughout the economy.

Open Market Operations

The buying and selling of U.S. Treasury securities by the Federal Reserve to regulate reserves in the banking system.

Federal Funds Rate

The interest rate at which banks lend reserves to each other overnight.

Chain Reaction of Reserves

The increase in bank reserves that leads to lower interest rates and stimulates borrowing and spending.

Monetary Base

The sum of reserves and currency in circulation, controlled by the Federal Reserve.

Flow of Money

The process starting from the Fed controlling base money, which affects reserves, influences bank lending, and ultimately affects consumers and businesses.