Term
| fractional reserve banking |
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Definition
| A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed. |
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| the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed. |
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| the percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed. |
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| potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves. |
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| transferring currenty to a bank and moving deposits from one bank to another do not affect the money supply (M1). |
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| When a bank makes a loan, it creates deposits, and the money supply increases by the amount of the loan because the money supply includes checkable deposits. |
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| the maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold. The money multiplier is equal to 1/required reserve ratio |
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| the Fed Reserve's use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1). |
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| the buying and selling of government securities by the Federal Reserve System |
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| A purchase of govt securities by the Fed injects reserves into the banking system and increases the money supply. A sale of govt securities by the Fed reduces reserves in the banking system and decreases the money supply. |
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| the interest rate the Fed charges on loans of reserves to banks. |
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| a private market in which banks lend reserves to each other for less than 24 hours |
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| the interest rate banks charge for overnight loans of reserves to other banks in the Fed. funds market. |
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| There is an inverse relationship between the size of the required reserve ratio and the money multiplier. |
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| If the Fed wishes to increase the money supply, it decreases the required reserve ratio. If the OBJ is to dec. the money supply, the Fed inc. the required reserve ratio. In reality, changing the required reserve ration is considered a heavy-handed approach that is an infrequently used tool of monetary policy. |
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