3 36 through open market operations the federal

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Through Open Market operations, the Federal Reserve increased deposits at financial institutions by $90 billion. If the reserve requirement for all deposits is 8 percent, what is the maximum effect that the Fed’s actions can have on total deposits? Example - Problem 4.2
3-37 Solution - Problem 4.2 Increase in deposits = $90 billion
3-38 Central Bank – Federal Reserve System Federal Reserve (Fed) Manages the monetary policy of the country Decentralized network of regional, district banks Supervised by the Board of Governors, who are appointed by the President
3-39 Responsibilities of the Fed Monetary Policy of the U.S. To promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates Open Market Operations Buy and sell Treasury securities to expand or contract the nation’s money supply
3-40 Monetary Policy • Change Money Supply – Increase M s —buy securities from dealers – Decrease M s —sell securities to dealers Federal Reserve Bank of Primary Dealer Receive securities from bank/dealer Make payment—increase bank reserves (money flows to the public) Federal Reserve Bank of Primary Dealer Deliver securities to bank/dealer Receive payment decrease bank reserves (money flows from the public)
3-41 Monetary Policy Reserve requirement Funds that a financial institution must retain “in the vault” to back customers’ deposits Discount rate Charged by the Fed for loans it makes to banks to meet temporary shortages in required reserves
Key Chapter Principles What are financial markets?
Why are there so many different types of financial markets?
Key Chapter Principles Why is it important for financial markets to be economically efficient?
Why is it important for financial markets to be informationally efficient?
Key Chapter Principles What is a financial intermediary? Why are there so many different types?
What functions do financial intermediaries perform?
Key Chapter Principles What is a fractional reserve system?
What are the major characteristics of the U.S. banking system?
3-45
Key Chapter Principles What is the function of the Federal Reserve?

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