BANKING AND THE FEDERAL RESERVE SYSTEM

Transcription

1 Name Date Period BANKING AND THE FEDERAL RESERVE SYSTEM BEFORE YOU BEGIN Looking at the Fill in the blank spaces with the missing words. Structure of the Fed The Federal Reserve System Functions of the Fed of controls and coordinates the Fed s activities. the supply There are 12 banks. Supply (Federal Reserve Notes) Hold The is the major policy-making group in the Fed. Provide - services member banks of Study Guide 4 NTC/Contemporary Publishing Group, Inc.

2 A bank s total reserves = deposits on reserve at Fed + Banks lend out their. The Money Creation Process A in = 1 times the Reserve Requirement change in reserves at the first bank Banks money by creating deposits. Study Guide 5 NTC/Contemporary Publishing Group, Inc.

3 Outlining the Look over the chapter paying attention to the main topics and concepts. As you look over each section of the chapter, fill in the missing words in the outline below. I. The (or the Fed) A. The Federal Reserve System, was set up by the in The of of the Federal Reserve System controls and coordinates the Fed s activities. a. The Board is made up of members, each appointed to a term by the president of the United States with Senate approval. b. The president also designates one member as of the for a term. 2. There are Federal Reserve district banks. 3. The (FOMC) is the major policy-making group within the Fed. a. The FOMC has members. b. of the members are the members of the Board of Governors. The other five members come from the of the Federal Reserve district banks. B. Functions of the Federal Reserve System 1. the money supply. 2. the economy with paper money (Federal Reserve notes). a. The notes are issued to the 12 Federal Reserve district banks, which keep the money on hand to meet the demands of the banks and the public. 3. Hold bank. 4. Provide. a. The process is how funds change hands when checks are written. 5. member banks. Study Guide 6 NTC/Contemporary Publishing Group, Inc.

4 6. Serve as the of for banks suffering cash management problems. II. The Money Process A. A few preliminary facts 1. A bank s total = deposits in the account at the Fed. a. For example, if Bank A has $10 million in its reserve account with the Fed and $2 million in its vault, then its total reserves equal $ million. 2. Total reserves can be divided up into reserves and reserves. a. reserves are the amount of reserves a bank must hold against its account deposits as mandated by the Fed. b. A bank s is the percentage of this total amount in the form of reserves that is, either as deposits in its reserve account at the Fed or as vault cash (since both of these are reserves). c. Required reserves = deposits. 3. Excess reserves =. 4. Banks can make with their excess reserves. B. Banks create checking account deposits (demand deposits) and thus increase the money supply. 1. Money supply = account deposits checks. 2. Banks can create deposits, and by doing so, increase the. C. The bank creates new with its reserves. D. How much money was created, and who created what? 1. A simple formula can be used to find the (maximum) change in the money supply ($10,000) brought about in the example: Change in Money Supply = 1 in reserves at the first bank reserve requirement Study Guide 7 NTC/Contemporary Publishing Group, Inc.

5 Name Date Period III. Fed Tools For Changing The Money Supply A. Changing the requirement 1. The Fed can increase or decrease the money supply by changing the : Lower reserve requirement Money supply Raise reserve requirement Money supply B. operations 1. A government security is a piece of paper promising to pay a certain dollar amount of money in the future. 2. Members of the public buy government securities. 3. The Fed may buy government securities from any member of the public or sell them. 4. When it buys a government security, it is said to be conducting an. When it sells a government security, it is said to be conducting an. 5. Open-market purchases the money supply. 6. Open-market sales the money supply. C. Changing the 1. The interest rate charged by a bank to lend money to another bank is called the rate. 2. The interest rate charged by the Fed to lend money to a member bank is called the rate. Study Guide 8 NTC/Contemporary Publishing Group, Inc.

6 Name Date Period Building Vocabulary Match each definition or description below with the correct term from the following list. Write the correct letter in the blank space next to the definition or description. a. board of governors b. discount rate c. excess reserves d. federal funds rate e. Federal Reserve System f. monetary policy g. federal open market committee h. open-market operations i. total reserves j. reserve requirement k. required reserves 1. This group controls and coordinates the Fed s activities. It consists of seven members, each appointed to a 14-year term by the president of the United States with Senate approval. 2. This is the major policy-making group within the Fed. 3. Deposits in the reserve account at the Fed plus a bank s vault cash make up. 4. The amount of reserves a bank must hold against its checking account deposits as mandated by the Fed is called. 5. The Fed requires through its that Bank A hold a percentage of this total amount in the form of reserves. 6. The difference between total reserves and required reserves is known as. 7. When the Fed changes the money supply, it is said to be conducting. 8. The interest rate charged by one bank for loaning money to another bank is called the. 9. The interest rate charged by the Fed to a member bank is called the. 10. The central bank of the United States is called the. Study Guide 9 NTC/Contemporary Publishing Group, Inc.

7 Name Date Period AS YOU STUDY Illustrating Economic Skills The Federal Reserve has three main tools to change the money supply: (1) change the reserve requirement; (2) conduct open-market operations; and (3) change the discount rate. Suppose you were a member of the Board of Governors of the Federal Reserve. Complete the following diagram based on the information given below. Reserve Requirement If the Fed increases the reserve requirement, this means banks have to loan out, and the money supply. If the Fed decreases the reserve requirement, this means banks have to loan out, and the money supply. Open-Market Operations The buys and sells for the Fed. Open market by the Fed increase the money supply. Open market by the Fed decrease the money supply. The Discount Rate If the Fed raises the discount rate relative to the, the money supply. If the Fed the discount rate relative to the, the money supply. Study Guide 120 NTC/Contemporary Publishing Group, Inc.

8 Name Date Period Using Economic Concepts The Fed has set the reserve requirement at 20 percent. Fred magically creates $20,000 and deposits it at Bank A. Bank A loans its excess reserves to Ned, who deposits it at Bank B. Bank B then loans out its excess reserves to Ted, and the process continues until there are no new excess reserves to loan out. The diagram below follows this money creation process. Complete this diagram with the information provided below. Bank New checking Required Excess reserves, deposits reserves new loans, or new (new reserves) bank-created deposits A $20,000 $4,000 $ B $ $ $ C $ $2,560 $10,240 D $10,240 $ $ E $8,192 $1, $6,553.6 Totals $100,000 $ $ Amount created Amount created Amount created by Fred by banking system by Fred and banking system $ $ $ Study Guide 121 NTC/Contemporary Publishing Group, Inc.

9 AS YOU REVIEW Practicing for the Test Multiple Choice: Choose the answer that gives the correct description or answer and write the corresponding letter in the blank on the left. 1. Which of the following Fed actions will decrease the money supply? a. an open market purchase of government securities b. an increase in the required-reserve ratio c. a decrease in the discount rate d. an increase in the federal funds rate 2. The discount rate is the interest rate. a. banks pay on mutual funds b. the Fed pays on reserves held at banks c. the Fed charges when it lends money to banks d. banks charge their loan customers 3. Suppose that the excess reserves in Bank A increase by $100 and the reserve requirement is 25 percent. What is the maximum change in checkable deposits brought about by the banking system? a. $200 b. $400 c. $600 d. $ Which of the following is NOT a responsibility of the Fed? a. supplying paper money b. providing check-clearing services c. supervising Federal reserve member banks d. changing government spending 5. The Fed must seek the guidance of which of the following in controlling the nation s money supply? a. Congress b. the president c. the Supreme Court d. none of the above 6. Which of the following is NOT included in our definition of money? a. federal reserve notes b. checkable deposits c. traveler s checks d. credit cards Study Guide 122 NTC/Contemporary Publishing Group, Inc.

10 7. Total bank reserves equal. a. checkable deposits plus vault cash plus credit cards b. vault cash plus currency outside of the bank c. bank deposits at the Fed d. bank deposits at the Fed plus vault cash 8. Which of the following Fed actions will increase the money supply? a. lower the reserve requirement b. raise the reserve requirement c. open market sales d. raise the discount rate relative to the federal funds rate 9. When the Fed buys government securities, it is. a. making open market purchases b. making open market sales c. changing the reserve requirement d. changing the federal funds 10. The major policy-making group in the Fed is the. a. reserve System b. Required Reserve Committee c. twelve bank presidents d. Open Market Committee Short Answer: 1. A $100 bill magically appears to you. You take the $100 and deposit it in your checking account at First Bank. Explain how your deposit begins a money creation process. Assume the required-reserve ratio is 10% and that banks loan out all of their excess reserves. Study Guide 123 NTC/Contemporary Publishing Group, Inc.

11 2. What are the monetary tools available to the Fed to change the money supply? 3. Describe the major functions of the Fed. Study Guide 124 NTC/Contemporary Publishing Group, Inc.