Federal Reserve Flashcards
Monetary base
Sum of federal reserve notes, coins and bank deposits at the federal reserve
Federal reserve
Established in 1913 and is the central bank of the U.S.
Structure of federal reserve system
1) the regional federal reserve banks
2) the board of governors
3) the federal open market committee
The U.S. Federal reserve is divided into how many districts?
12 each of which has one central bank
Federal reserve banks
Owned by members of the bank u which each shares stock that must equal 3% of their capital and surplus funds, are banks for banks, and depository for banks in the district
12 district banks
Have 9 directors: 3 are appointed by the board of governors, 6 are elected by commercial banks in the district. The directors appoint the district president which is approved by the board of governors
The 9 person board of directors
Class A- 3 people representing commercial banks
Class B- 3 people selected by commercial banks of district
Class C- 3 people representing public (selected by board of governors)
The board of governors
Seven members, appointed by the president, confirmed by senate, serve 14 year term
The federal open market committee (FOMC)
Is responsible for the fed’s daily activity in financial markets, meets every 4-6 weeks to review economy, and sets policy on purchase of gov’t securities in open market
Functions of federal reserve
Hold bank reserves (deposits) and makes loans, collects checks, is fiscal agent of fed gov’t, supervises operations of member banks, including providing deposit insurance against bank failures, regulates money supply to the needs of the economy to insure sufficient currency in circulation
Policy tools
Open market operations, reserve ratio, discount rate
When the fed buys securities in an open market operation:
Monetary base increases, banks increase their lending ability, the quantity of money (money supply) increases
When the fed sells securities in an open market operation:
The monetary base decreases, banks decrease their lending, the quantity of money decreases
Purchase of securities from a bank leads to:
1) an increase in the banks reserves (no change in the quantity of money)
2) banks lend excess reserves
3) new deposits are used to make payments
4) the money supply increases
5) some of the new money is held as currency (a currency drain)
6) some of the new money remains on deposit in banks
7) banks required reserve increase
8) excess reserves decrease, but remain positive
Monetary policy
The adjustment of the quantity of money in circulation to achieve specific economic goals
