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test2review - Chapter 7 & 8 Organizational structure of the...

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Organizational structure of the Fed- Created to diffuse power along regional lines, between the private sector and the govn’t, and among bankers, business people and the public - Federal Reserve Banks - 12 district banks in the Federal Reserve System - Board of Governors of the Federal Reserve system -head board with 7 governors, including the chairman, that plays an essential role in decision making in the Fed and 5 fed bank presidents. Regulatory duties- approves bank mergers, specifies permissible activities of bank holding companies, and supervises foreign banks on us soil - Federal Open Market Committee (FOMC)- committee that makes decisions regarding the conduct of open market operations (Purchase and sale of government securities that affect both interest rates and the amount or reserves in the banking system), composed of 7 members of the board of governors, the president of the Fed reserve bank in New York, & presidents of 4 other fed reserve banks on a rotating basis. - Federal Advisory Council- - 3600 Commercial Banks- All National Banks (commercial banks chartered by the office of comptroller of currency) are required to be members of the Fed reserve system. All depository institutions are required to keep the same reserve, member or not. Tools of Monetary Policy- - Open Market Operations- most important monetary policy tool because they are the primary determinant of changes in reserves in the banking system and interest rates. -Open market purchase leads to an expansion of the reserves and deposits in the banking system and hence to an expansion of the monetary base and the money supply. Fed makes a purchase people get money and deposit it. -Open market sale- leads to a contraction of reserves and deposits in the banking system and hence to a decline in the monetary base and money supply. Fed makes a sale and people take money out to buy it. - Discount Rate - The rate at which the Fed lends money to banks - Discount Loan- leads to an expansion of reserves, which can be lent out as deposits, thereby leading to an expansion in monetary base and money supply. -Discount Loan Repayment- repay the loan and so reduces the total amount of discount lending, the amount of reserves decreases along with the monetary base and the money supply. - Reserve Requirements- regulations making it obligatory for depository institutions to keep a certain fraction of their deposits as reserves w/ the fed. Market for reserves and the determination of the Fed Fund Rate - Fed Fund Rate - the rate that banks give to each other overnight, the rate the Fed tries to control directly. Indicative of fed stance on monetary policy, Fed
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Funds Rate=interest rate that could have been earned on excess reserves - Market for Reserves- -Demand Curve- Quantity demanded=> required reserves + excess reserves. -Reserve requirements- increase reserve requirement=> more
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This note was uploaded on 02/27/2008 for the course FNCE 3020 taught by Professor Madigan,ge during the Spring '07 term at Colorado.

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test2review - Chapter 7 & 8 Organizational structure of the...

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