Final Flashcards
Federal Reserve System
1) Issue of Currency (legal tender)
2) Serve as Bankers Bank
3) Serve as Fiscal agent for the U.S. treasury
4) Conduct monetary policy (tools: money supply and interest rates: Fed fund rate and discount rate (bank rate)
Issue of currency
legal tender provides liquidity to the economy
legal tender constitutes the monetary base/high-powered money to the economy
Board of governers
- 7 members
- Nominated by the president and approved by the senate
- Term 14 years (staggered)
- leaded by the chairman of the board (nominated and approved by the senate [4 year term renewable]
Federal reserve banks
- 12 entities
- Board of directors / Headed by a president
- 6 members elected and 13 non-members
FOMC
- consists of 12 members
- 7 board members
- 5 Presidents of the federal reserve banks (rotational basis except president of New York federal reserve is constant
FAC
- 12 members drawn from 12 federal reserve banks
- makes policy recommendations (not binding)
Functions of board of govenors
1) general supervision of the Federal reserve banks
2) Establishment and enforcement of legal reserve requirements
3) Determination of the discount rate (D.R.)
4) Determination of Margin requirement (how much a bank can loan [%] and how much potential buyer has to come up with [%]
5) regulation of bank holding companies and edge act corporations (finance international trade) [Foreign activities of members and foreign banks in the U.S.]
Functions of Federal reserve banks
1) Issue of currency (Legal tender)
2) Supply of currency / liquidity to members
3) Collection and clearance of checks (Intra and Inter-District)
4) Regulation and supervision of state member banks
5) Operation of discount windows
6) Initial evaluation and approval of mergers and acquisitions.
7) Economic research and dissemination of financial info and analysis
8) Managing Federal funds
Functions of Members
(depository institutions)
1) Owners of Federal reserve banks
2) Own 6% shares issued by federal reserve banks amounting to 6% of individual banks capital and surplus
3) Entitles to receive 6% dividend on shares subscribed
4) Entitled to elect 6 ‘A’ and ‘B’ class members to the Board of directors
5) Required to maintain legal reserves
Functions of FOMC
1) Buying treasuries
- From banks: Proceeds received by the banks augment the reserves of banks which leads to expansion of loans
- From individuals
- From individuals and households: Deposit the proceeds into their respective Banks, Bank reserves go up causing lending to increase
- From other entities[Corporations Financial entities]: Deposit proceeds into their respective Banks; reserves go up and lending increases
2) Selling treasuries
- Contraction in bank reserves
- Contraction in M (money supply)
Multiple deposit creation
- Process: Initial deposit placed in the hands of a bank gets multiplied many times over based on the reserves to be set aside and the act of banks being able to remain fully loaned up and the subsequent loans get issued uninterruptedly
- Parties involved
1) Federal reserve (Central banks)
2) Banks: receivers of deposits and lenders
3) Depositors
4) Borrowers
types of multiple deposit creation
- Simple deposit multiplier (one Leakage: legal reserve against transaction deposits)
- Composite Deposit Multiplier( Leakages: 1) legal reserve against transaction deposits 2) C-in-C : money withran by depositors 3) Excess reserves kept by banks on their own volition)
- Money multiplier
Simple Deposit Multiplier
Framework: T-Account model
Interactive if the process of loaning-Depositing-Loaning were to continue, ultimately the total/cumulative deposits (Primary and Derivative) would amount to ten times of total deposit
Absolute deposits = (Absolute Reserves) (1/ Legal reserve ratio)
Composite Deposit Multiplier
Initial influx of deposits/ Reserves (R) = Legal reserves against transaction deposits (D * Rd) + Money withdrawn by depositors (C) + Voluntary Excess Reserves kept by banks (E)
Money Multiplier
Money supply = (Reserves) ([1+ k] / [Rd + R + e])
