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The Banking System



a financial instrument representing a loan made to a governmental or corporate body by some entity that requires repayment of the initial loan price plus interest on a fixed schedule

central bank

the national bank of a country, usually serving as a banking institution for commercial banks to use and a way for the government to influence financial activity

commercial bank

a private bank primarily concerned with maximizing its revenue through holding deposits and making loans and investments with a portion of those deposits

demand deposit

money consumers have placed in the bank for safekeeping

depository institution

a financial institution legally allowed to accept monetary deposits from customers

discount rate

the interest rate on loans the Federal Reserve makes directly to banks to meet temporary shortages of reserves

excess reserves

the amount of money a bank has available to loan or invest, made up of all deposits minus the required reserves; reserves held in excess of the reserve requirement required by regulators

federal funds rate

rate charged for loans of excess reserves between banks to meet reserve requirements

financial crisis

a spiraling downturn in the economy, wherein the value of assets and the strength of the economy falls rapidly

money multiplier

the amount of money generated by the banking system with each dollar of reserves; it is equal to 1/RR1/\text{RR}, where RR\text{RR} is the required reserve ratio.

money supply

the amount of money free to circulate and power economic activity in an economy

multiple expansion of deposits

the continued expansion of the money supply that occurs when money created by fractional reserve banking is redeposited, which creates more money, which can itself be re-deposited, and create further economic growth

open market operation

the process through which the Federal Reserve buys Treasury bills to expand the money supply or sells Treasury bills to contract the money supply

price stability

a state in which prices do not change much over time, and there is little inflation or deflation

required reserve ratio (RR)

the percentage of deposits a bank is required to hold in reserve and not lend out or invest

required reserves

the amount of money a bank has held back from deposits received, which is not available to loan or invest


a financial instrument representing monetary value, such as a stock, bond, or option

Treasury bill

a security issued by the U.S. Treasury Department representing a short-term debt obligation, with a relatively low interest rate but a maturity period of less than a year