1. Chapter 15 The Fed and Monetary Policy Section 1 p. 255 Terms: Member banks 407 commercial banks that are members of, and hold stock in, the Fed Federal Reserve organized in 1913 as a corporation Issued stock National banks MUST belong State banks have option to join.

2. Bank holding companies 410 corporations that own one or more banks. Do not accept deposits or make loans Stock for a bank is usually sold by the holding company Bankers created holding companies to get around New Deal bank regulations during the Great Depression.

3. Regulation Z 411 the Fed has the authority to extend truth- in-lending vouchers to millions of individuals who borrow from Corporations Retail stores Automobile dealers Banks Lending institutions

4. currency 413 the paper component of the money supply. Denominations are printed by the Bureau of Engraving stored in reserve district banks

5. coins 413 metallic forms of money Pennies Nickels Dimes Quarters Half-dollars Sacagawea, Susan B. Anthony, “presidents” dollar Provide them to banks as needed.

6. Section 2 p. Terms: Monetary policy 415 is the expansion or contraction of the money supply by the Fed in order to….. Influence the cost and availability of credit. Note: – more credit – stimulate spending – Less credit – fight inflation, decrease spending

7. Fractional reserve systems 415 requires banks and other depository institutions to keep a fraction of their deposits in the form of legal reserves.

8. Legal reserves 415 coins and currency that depository institutions hold in their vaults Plus deposits with Federal district banks

9. Reserve requirement 415 a rule stating that a percentage of every deposit be set aside as legal reserves. Fed changes the reserve requirement as needed. Note: Fed Raises: to slow spending and inflation Fed Lowers: to stimulate spending Go to page 421….. (use exam graph on proj.)

10. Excess reserves 416 legal reserves over the reserve requirement. The bank can loan these funds

11. liabilities 416 debts and obligations to others

12. assets 416 properties, possessions, and claims on others

13. Balance sheet 416 a condensed statement showing all assets and liabilities at a given date. It reflects Net worth The excess of assets over liabilities The measure of the value of a business

14. liquidity 417 the potential to be converted into cash in a very short time. Helps banks serve their customers Ex: bank can sell its bonds to raise cash to loan to customers.

15. Savings account/time deposit 417 interest bearing deposits that cannot be withdrawn by check. Prior notice must be given to release a time deposit.

16. Member bank reserve 418 aka “MBR” A deposit a member bank keeps at the Federal Reserve to meet reserve requirements.

17. Easy money policy 419 the Fed allows the money supply to grow and interest rates to fall. Goal is to stimulate the economy. Low interest rates encourage people to buy on credit. Businesses will borrow more money as well.

18. Tight money policy 419 The Fed restricts the growth of the money supply Drives interest rates up; making it more expensive to borrow money. Consumers and businesses spend less Keeps inflation rate low.

19. Open market operations 420 the buying and selling of government securities in financial markets Another tool of the Fed Selling more securities: – decreases the money supply – Pushes up interest rates Buying up securities – increases money supply – Interest rates decrease

20. Discount rate 319 the interest rate the Fed charges financial institutions when they borrow. Another monetary tool of the Fed High DR = lower borrowing and spending Low DR = higher borrowing and spending

21. Margin requirement 423 minimum deposits left with a stockbroker to be used as down payment to buy other securities. Another Fed tool. Low MR = more money, more borrowing High MR = less money, less borrowing

22. Moral suasion 424 another Fed tool – Fed makes public announcements Magazine/newspaper articles Testimony before Congress Press releases To motivate or convince banks to behave a certain way.

23. Selective credit controls 424 Another Fed tool: credit rules pertaining to particular commodities or purposes Used in WWII to reduce consumer production by factories – Increase military production

24. Hwk Assessments, Class Work, to Know

25. Assessments: section 1, Checking for Understanding 1 To provide financial services to the government Regulate financial institutions Maintain the payments system Enforce consumer protection laws Conduct monetary policy

26. 3 Member banks – contribute a small amount of funds to the Fed – receive ownership shares in return – Select directors for each of the 12 district banks Overall supervision of the Fed is in the hands of a seven-member Board of Governors – Appointed by the President – Approved/not approved by the Senate The Board – Dominates the Federal Open Market Committee – Makes monetary policy Member banks can advise the Board through the Federal Advisory Council – Has one representative for each district bank.

27. 4 State member bank supervision Holding companies International operations Mergers Check clearing Consumer legislation Currency Margin requirements Maintain currency and coin

28. Assessments: section 2, Checking for Understanding 1 To influence the cost and availability of credit To keep the economy healthy

29. 3 They are used to control the supply of money

30. 4 The reserve requirement determines the amount of legal reserves a bank has to keep This determines ….. – how much money a bank can lend – the size of the money supply.

31. 5 (just identify them, we have the definitions already) Reserve requirement Open market operations The discount rate

32. Image, p. 408 Question Supervises and regulates the Fed

33. Image, p. 409 Question It sets general policies for Federal Reserve and member banks to follow Regulates certain operations of state- chartered member banks Conducts some aspects of monetary policy

34. Image, p. 410 Question Conducts nationwide auctions of Treasury bills, bonds, and notes Issues, services, and redeems these securities on behalf of the Treasury Maintains the equivalent of numerous demand deposit accounts for the Treasury Clears checks drawn on those accounts Processes savings bonds Maintains accounts for IRS Issues federal agency checks

35. Image, p. 411 Question If the surviving banks is a state member bank, the Fed must approve the merger.

36. Image, p. 417 Question $80

37. Image, p. 419 Question 419 $10,000

38. Image p. 421 Question $4,000

39. Image, p. 422 Question Changes in the discount rate usually result in other interest groups

40. 6 Image, p. 423 Question Expands Contracts