FIN3244 Test 2 Chapter 19 and 20 Review Terms to Know Central Bank Money monetary base Commercial Bank Money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services Money Multiplier Monetary Policy The process by which The Feds control the supply of money Often targets the rate of interest to promote growth and stability o Official goals usually include stable prices and low unemployment Monetary Base The money supply or the amount of money in the economy o Consists of high liquidity coins paper money vault cash and cash in circulation and commercial bank reserves with the central banks Money Multiplier ratio of commercial bank money to central bank money Measures the maximum amount of commercial bank money that can be created by a given unit of central bank money Required Reserve Ratio is a central bank regulation that sets the minimum reserves each commercial bank must hold rather than lend out of customer deposits and notes Open Market Purchase The purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply Open Market Sale The sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply FMOC Federal Open Market Committee TRAPS Trading Room Automated Processing System Float checkbook money that appears on the books of both the check writer and the check receiver while the check is being processed Federal Reserve Float the difference between cash items in the process of collection and deferred availability cash items reported in the Fed s balance sheet Depository Institution a financial institution that is legally allowed to accept monetary deposits from consumers Financial Intermediaries a financial institution that connects surplus lenders and deficit borrowers agents Banks Credit Unions Insurance Companies Pension Funds Nonpersonal Time Deposit Time deposit accounts held by corporate bank customers that pay a fixed amount of interest for a specified time period Money market deposit accounts CD s Checkable deposits Any demand deposit account against which checks of any kind may be written checking savings money market accounts State Bank a financial institution that is chartered by a state National Bank an ordinary private bank Margin Requirements the proportion of the purchase price of securities that an investor must pay in cash rather than buying on credit Securities financial instrument Debt bonds Equity stocks Principal Agent Problem The type of moral hazard that may arise when managers agents who control a firm s assets do not own very much of the firm s equity and therefore do not have the same incentive to maximize the firms value as the owners principals do Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve called federal fund Ch 19 Federal Reserve System The central bank in the United States which promotes price stability in the banking industry and issues currency o Federal Reserve Act of 1913 o Created a central Bank for the United States o Act provided checks and balances that were designed to diffuse economic power in three ways 1 Among bankers and business interests 2 Among states and regions 3 Between government and the private sector o Created four groups within the system each empowered in theory to perform separate duties Federal Reserve Banks a district bank of the federal reserve system that among other things conducts discount lending The federal Reserve Act divided the United States into 12 Federal Reserve Districts each of which has a Federal Reserve bank in one city to conduct discount lending Most Federal Reserve districts contain urban and rural areas as well as manufacturing agriculture and service business interest Intentional to prevent any one interest group or one state from obtaining special treatment from the district Federal Reserve bank Policies cannot be made for a single district Who Owns the Federal Reserve Bank In principle the private commercial banks in each district that are members of the federal reserve system In fact Each Federal Reserve bank is a private government joint venture Duties of the 12 Federal Reserve Banks Manage check clearing in the payment system Manage currency in circulation issue new Fed Reserve notes with draw damaged notes Conduct discount lending by making and administering discount loans to banks within the district Supervise and Regulate state member banks Publish articles on monetary and banking topics for businesses o Member Banks Banks that are members of the Federal Reserve System All National Banks are required to become member banks State Banks may elect to become members Historically Why banks chose not to be a member Cost The Fed s Reserve requirements make banks keep part of their deposits as idle funds basically imposing a tax on deposits Have less funds to invest Today banks member and nonmember are required to maintain reserve deposits with the Fed on the same terms o Board of Governors The board of the Federal Reserve System made up of seven members appointed by the president who administer monetary policy and set the discount rate Administers monetary policy to influence the nation s money supply through open market operations reserve requirements and discount lending Sets the discount rate through its review and determination procedure Holds seven of the 12 seats on the Federal Open Market Committee therefore influence the setting of guidelines for open market operations The chairman of the Board of Governors advises the president and testifies before Congress on economic matters Therefore the BoG influences national and international economic policy decisions Sets margin requirements o Federal Open Market Committee FOMC 12 member committee that gives direction to the Fed s open market operations Members include Chairman of the Board of Governors The other Fed governors The president of the Federal Reserve Bank of New York Presidents of 4 of the other 11 Federal Reserve Banks who serve on a rotating basis Centerpiece of Fed policymaking o Power of The Fed o Board of Governors have the authority to set reserve requirements o FOMC have the authority to direct open market operations o The Board of Governors and FOMC exert most of the Fed s formal influence on monetary policy o Member banks in theory the owner of the Federal Reserve Banks
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