The Federal Reserve System

These flashcards cover key concepts and terms related to the structure and function of the Federal Reserve System, focusing on monetary policy, tools of the Fed, and their economic implications.

What is the primary role of the Federal Reserve System?

To control the money supply and regulate banks.

When was the Federal Reserve System created?

In 1913.

What is monetary policy?

The use of money and credit controls to influence macroeconomic outcomes.

What are the four main tools of monetary policy used by the Fed?

Reserve requirements, interest rates on bank reserve balances, discount rates, and open market operations.

What is the Federal Open Market Committee (FOMC)?

A component of the Federal Reserve responsible for regulating the money supply through open market operations.

What is the purpose of reserve requirements?

To control the amount of money banks can lend based on the reserves they hold.

What is the significance of excess reserves for banks?

Excess reserves indicate that banks have more reserves than required and can increase lending capacity.

How can the Fed increase the money supply?

By lowering reserve requirements, reducing the interest on reserves, reducing the discount rate, or buying bonds.

What happens to the lending capacity of banks when the required reserve ratio increases?

The lending capacity of banks decreases.

What effect does an increase in the discount rate have on lending?

It makes borrowing from the Fed more expensive, which can decrease bank lending.

What is open market operations?

The buying and selling of government bonds by the Fed to influence the banking system's reserves.

What is the Federal Funds Rate?

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

What is Quantitative Easing (QE)?

A policy where the Fed buys longer-term bonds and securities to increase the money supply.

What is the target federal funds rate?

The desired interest rate set by the Fed, which it tries to achieve through open market operations.

How does selling bonds affect the money supply?

Selling bonds reduces bank reserves and decreases the money supply.

What is crowdfunding and how does it relate to banks?

Crowdfunding is financing through individual contributions that bypasses banks, weakening their role in the economy.