test review amp Flashcards
How do local banks create money?
They make money from what they call the spread, or the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make
What is the function of the local bank?
enhance the community that it resides within.
Define required reserves
minimum cash the bank can keep on hand
Define excess reserves
any cash over the required minimum that the bank is holding in its vault rather than lending out to businesses and consumers.
Define non-borrowed excess reserves
nonborrowed reserves are equal to total reserves minus borrowed reserves. Non-borrowed reserves are held by banks as additional protection against unexpected withdrawals. They are reserves that are typically the result of excess deposits and are not loans taken from a central bank
What are the main functions of the US Central Bank?
1) Conducting national monetary policy by influencing monetary and credit conditions in the U.S. economy to ensure maximum employment, stable prices and moderate long-term interest rates.
2) Supervising and regulating banking institutions to ensure safety of the U.S. banking and financial system and to protect consumers’ credit rights.
3) Maintaining financial system stability and containing systemic risk.
4) Providing financial services - including a pivotal role in operating the national payments system - to depository institutions, the U.S. government and foreign official institutions.
How did Congress ensure that the US central bank would have independence from the federal government?
The FED (U.S. central bank) is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The system however is subject to oversight by the U.S. Congress and must work within the framework and objectives of the economic and financial policies established by the U.S. government.
How has central bank independence benefited the US?
Without political interference, independent central banks are then able to commit to a clear monetary policy, anchor expectations, and better control inflation
What is the dual mandate of the Federal Reserve
pursuing the economic goals of maximum employment and price stability
How does it differ from the single mandate of the ECB?
European Central Banks objective is to maintain price stability by ensuring that inflation stays low, stable, and predictable
What is the purpose, function, structure and responsibility of the 12 Regional Reserve Banks?
The central bank of the United States, consisting of 12 regional banks and the Board of Governors. The Federal Reserve System conducts monetary policy, supervises and regulates banks, monitors the stability of the financial sector, and provides financial services to the U.S. government.
prime rate
interest rate at which banks lend to customers with good credit
fed funds rate
rate at which commerical banks borrow and lend their excessreserves to each other overnight
discount rate
rate of interest charged by fed reserves banks for lending reserves to member banks
effective fed funds rate
calculated as a volume-weighted median of overnight federal funds transactions reported in the FR 2420 Report of Selected Money Market Rates.
