Week 3 Flashcards
What are central banks?
- Central banks’ actions affect interest rates, the amount of
credit, and the money supply, all of which have direct impacts
not only on financial markets but also on aggregate output
and inflation
What are Variations in the Functions and Structures of Central
Banks?
- The roles of central banks have grown in importance as their
activities evolve over time. - There are differences in the structure and policy tools that
each central bank adopts depending on the level of
sophistication of the banking and financial sectors. - Central banks have taken on increasing responsibilities which
required more independence from fiscal authorities and
political institutions.
What are the goals of central banks?
Price stability
- High inflation seems to create uncertainty, hampering
economic growth: Price information hard to interpret →
complicates decision-making → inefficient financial system →
lower economic growth
high employment
- when unemployment is high, the economy has both idle
workers and idle resources, resulting in a loss of output
Economic growth
- more likely to invest in capital equipment to increase
productivity and economic growth when unemployment is low
Interest rate stability
- Create uncertainty in the economy and make it harder to plan
for the future; increase in interest rates produces large capital losses on long-term bonds and mortgages.
What are the federal reserve system’s asset and liabilities?
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What are the federal reserve system’s asset and liabilities?
Liabilities
- Currency in circulation: in the hands of the public
- Reserves: bank deposits at the Fed + cash held at bank’s vault
Assets
- Government securities: holdings by the Fed that affect money supply and earn interest
- Discount loans: provide reserves to banks and earn the
discount rate
How can the monetary base?
The monetary base (also called high-powered money) equals currency in circulation (C) plus the total reserves in banking system (R). The monetary base MB can be expressed as MB = C + R
What are open market operation?
The Federal Reserve exercises control over the monetary base
through its purchases or sales of securities in the open market,
called open market operations, and through its extension of discount loans to banks.
What are reserves?
All banks have an account at the Fed in which they hold
deposits. Reserves consist of deposits at the Fed plus
currency that is physically held by banks.
How are reserves divided into two categories?
- Required reserves
- Excess reserves
What is required reserve ratio?
The Fed sets the required reserve ratio – the portion of
deposits banks must hold in cash. Any reserves deposited with the Fed beyond this amount are excess reserves.
How Fed Actions Affect Reserves in the Banking System?
The Fed injects reserves into the banking system in two ways:
- Open market operations
- Loans to banks, referred to as discount loans
Equation for required reserves?
required reserves = required reserve ratio × the amount of
deposits on which reserves are required
