The Federal system

Question 1

In what year was the Fed system born?

Answer 1

1913

Question 2

What purposes did the fed system first have?

Answer 2

• lender of last resort
• Bank regulator
• Monitor for the money supply

Question 3

What are the fed system’s functions nowadays?

Answer 3

• Monetary policy
• Financial regulation
• Keep inflation low (maintain stable prices)
• Keep currency stable
• Stable financial system

Question 4

The board of directors set and change what?

Answer 4

The discount rate = the i on loans from the feds to financial institutions

Question 5

What is the discount window?

Answer 5

Allows institutions to borrow short-term funds at favorable conditions (depending on some conditions) to meet temporary shortages of liquidity

Question 6

What are the two tools for assistance in the conduction of monetary policy?

Answer 6

• Discount rate setting and discount window

Question 7

How does the feds supervise and regulate banking activity?

Answer 7

• Examinations and inspections
• Issue warnings for unsafe activities
• Provide applications for extended activities

Question 8

What government service does the feds provide?

Answer 8

They serve as a CB for the US Treasury

Question 9

What is check clearing?

Answer 9

It is used for interbank transactions

Question 10

How does the feds support commercial banks?

Answer 10

• Guaranteeing cheap credit
• Bailout = during crisis, it gives CBs credit to survive
• Provide loans (before and after 2003)

Question 11

What are the types of loans given by feds to CBs?

Answer 11

• Adjustment credit (primary credit) –> short-term loans, 1% higher than target rate w/o any usage restriction
• Extended credit (secondary credit) –> available for troubled institutions and MUST be used to recover and balance a stable situation (cannot be used to expand assets)
• Seasonal credit –> to cover credits of deposits that are natural/cyclical . Banks need to demonstrate cyclical pattern. They use it to invest in long-term assets to have higher returns

Question 12

What are the 3 different kinds of reserves?

Answer 12

• Minimum reserve = established in % of obligations/liabilities (on the banks themselves)
• Required reserves = required by law to meet demand deposit obligations (on the central bank)
• Actual reserves = if > minimum = excess reserve

Question 13

How is the FOCM organized?

Answer 13

• 7 board members from the board of governors with a nonrenewable 14-year term appointed by the president and confirmed by the senate. They are not all elected at the same time to prevent too much political influence.

Question 14

How many meetings does the FOCM have per year and where are they documented?

Answer 14

8 per year documented on the beige book

Question 15

What does the FOCM had to decide upon?

Answer 15

Monetary targets

Question 16

What are Open market activities?

Answer 16

Feds reserve’s purchases and sales of securities of the US treasury, affecting the money supply in the economy

Question 17

What is the first step of open market activities?

Answer 17

FOCM agrees on a target Money quantity or i and forward to the Federal reserve trading desk (who will conduct the operation)

Question 18

What does the federal reserve trading desk do?

Answer 18

They conduct open market activities

Question 19

What are the two tools used on open market activities?

Answer 19

Trading of securities or deciding/changing the i

Question 20

What happens when the feds decide to SELL securities?

Answer 20

It takes money out of circulation, so it is a contractionary policy, decreasing banks ability to make loans –> raises i

Question 21

What happens when the feds decide to BUY securities?

Answer 21

It injects money in the economy, so it is an expansionary policy, increasing banks ability to make loans –> lowers i

Question 22

What happens when the feds decide to INCREASE interest rates?

Answer 22

It lowers the amount of borrowing, tightening monetary conditions

Question 23

What happens when the feds decide to DECREASE interest rates?

Answer 23

It augments the amount of borrowing, expanding monetary conditions

Question 24

Why isn’t changing i rates largely used by the feds?

Answer 24

Because it is hard to predict banks behaviors, the effect is uncertain. But it is used to send a signal that they are serious about implementing monetary targets

Question 25

What happens when the feds decide to LOWER the reserve requirements?

Answer 25

It allows banks to lend a greater % of their deposits.

• i lowers
• Prices rise
• GDP rises