Honors Finance and Investments
Chapter 5
I. The Role of the Federal Reserve System
A. The purpose (Monetary Policy)
1.
2.
3. Economic growth
a)
b)
B. Tools of monetary policy
1. Primary tool
a)
2. Secondary tool
a)
b)
3. Fed uses these tools to
a)
C. Easy monetary policy
1.
D. Tight monetary policy
1.
E. Other Functions of the Fed
1. Supervises depository institutions
a)
b)
c)
2. Supervises check clearing
3. Serves as a depository institution
a)
b)
c)
4. Changes the supply of money
a)
II. Structure of the Federal Reserve
A. Board of Governors
1.
2.
3.
4.
B. Districts
1. 12 Districts
a)
2. Managed by nine directors
a)
C. Federal Open Market Committee (FOMC)
1.
D. Important components of the Federal Reserve System
1.
a) Appoints three of the nine directors of district
reserve banks
b) Composes a majority of the FOMC
c) Regulatory authority over commercial banks
2.
3.
4.
III.The expansion of Money and Credit
A. Bankers ability to lend comes from investors
1.
2.
3.
B. Process of loan creation
1.
2. Banks hold no excess reserves
a)
b)
C. Holding of Cash
1. Example, if I keep cash in my house and do not deposit
it in a bank, I am interfering with the act of increasing
money supply and credit
D. Depositing of Cash
1. Example, if I deposit $100 and the reserve requirement
is 10%, the bank must keep $10 on reserve, and the
excess ($90) can be loaned out which will increase credit
and money supply
E. Lending
1. Example, if a bank grants a borrower a loan of $90,
what effect does it have on the following?
a)
(1)
(2)
b)
(1)
c)
(1)
IV.
Cash Withdrawals and the Reduction in Reserves
A. If a bank is low on reserves because of excessive
withdrawals, the bank must somehow increase the
diminished reserves
B. Federal Funds Market
1.
2.
3.
4.
C. Federal Funds Rate
1. Interest rate charged by banks on overnight loans of
reserves
2.
3. Established by the demand and supply of funds
available in the federal funds market
D. Discount Rate
1.
2.
E. The supply of money and credit will contract if banks
are not willing to borrow from the Federal Reserve
V. The Tools of Monetary Policy
A.
B.
1. It is through the impact on banks reserves that the Fed
is able to affect interest rates and the economy
C. Three primary tools for affecting reserves
1.
2.
3.
D. Other Tools
1.
a)
b)
2.
VI.
Reserve Requirement
A.
B.
C. Reserve requirements are rarely used as a monetary
policy tool
VII. Discount Rate
A.
B.
1.
VIII. Open Market Operations
A. Buying and selling of US Treasury securities by the
Federal Reserve
B.
C.
D.
1. Transactions are negotiated by private US government
securities dealers
E. If the Fed wants to expand the supply of money…
1.
F. If the Fed wants to contract the supply of money…
1.
IX.
The Impact of Fiscal Policy on Credit Markets
A. Fiscal Policy
1.
B. Deficit
1.
C. Surplus
1.
D.
1. General public
2. Banks
3. Federal Reserve
4. Foreign investors
E.
1. General public
2. Banks
3. Federal Reserve
4. Foreign investors
X. Impact of an Inflationary Economic Environment on
Credit Markets
A. Inflation
1.
2. Prices
a)
3. General
a)
b)
B. Consumer Price Index
1. The Consumer Price Index (CPI) is a measure of the
average change over time in the prices paid by urban
consumers for a market basket of consumer goods and
services
C. Deflation
1.
D. Recession
1.