Chapter 16

Question 0

Reserves

Answer 0

In the U.S. Federal Reserve System, deposits held by Federal Reserve district banks for depository institutions, plus depository institutions’ vault cash.

Question 1

Fractional reserve banking

Answer 1

A system in which depository institutions hold reserves that are less than the amount of total deposits

Question 2

Legal reserves

Answer 2

Reserves that depository institutions are allowed by law to claim as reserves-for example, deposits held at Federal Reserve district banks and vault cash

Question 3

Required reserves

Answer 3

The value of reserves that a depository institution must hold in the form of vault cash or deposits with the Fed

Question 4

Required reserve ratio

Answer 4

The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed

Question 5

Excess reserves

Answer 5

The difference between legal reserves and required reserves

Question 6

Balance sheets

Answer 6

A statement of the assets and liabilities of any business entity, including financial institutions and the Federal Reserve System. Assets are what is owned; liabilities are what is owed

Question 7

Net worth

Answer 7

The difference between assets and liabilities

Question 8

Open market operations

Answer 8

The purchase and sale of existing U.S. Government securities (such as bonds) in the open private market by the Federal Reserve System.

Question 9

Money multiplier

Answer 9

A number that, when multiplied by a change in reserves in the banking system, yields the resulting change in the money supply

Question 10

Potential money multiplier

Answer 10

The reciprocal of the required reserve ratio, assuming no leakages into currency and no excess reserves. It is equal to 1 divided by the required reserve ratio

Question 11

Discount rate

Answer 11

The interest rate that the Federal Reserve changes for reserves that it lends to depository institutions. It is sometimes referred to as the re discount rate or, in Canada and England, as the bank rate

Question 12

Federal funds market

Answer 12

A private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them. Federal funds are usually lent for overnight use

Question 13

Federal funds rate

Answer 13

The interest rate that depository institutions pay to borrow reserves in the interbank federal funds market

Question 14

Sweep account

Answer 14

A depository institution account that entails regular shifts of funds from transactions deposits that are subject to reserve requirements to savings deposits that are exempt from reserve requirements

Question 15

Federal Deposit Insurance Corporation (FDIC)

Answer 15

A government agency that insures the deposits held in banks and most other depository institutions; all U.S. Banks are insured this way

Question 16

Bank runs

Answer 16

Attempts by many of a bank’s depositors to convert transactions and time deposits into currency out of fear that the bank’s liabilities may exceed its assets