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Money and Banking
Test 3
Undergraduate 4

Additional Economics Flashcards




Central Bank, Reserve Bank, or Monetary Authority
is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'.
Primary Goal of Monetary Policy
(6 items)
1.Price Stability
2.High Employment
3.Economic Growth
4.Stability of Financial Markets
5.Interest Rate Stability
6.Foreign Exchange Market Stability
Origins of the Federal Reserve System
(3 items)
1.Resistance to establishment of a central bank
2.No lender of last resort
3.Federal Reserve Act of 1913
Makeup of Federal Reserve Banks
Member banks elect six directors for each district; three more are appointed by the Board of Governors
- Three directors are professional bankers
- Three directors are prominent leaders from industry, labor, agriculture, or consumer sector
- Three directors appointed by the Board of Governors are not allowed to be officers, employees, or stockholders of banks
- Designed to reflect all constituencies of the public
- Nine directors appoint the president of the bank subject to approval by Board of Governors
Functions of the Federal Reserve Banks
(5 items)
1.Clear Checks
2.Issue New Currency
3.Withdraw Damaged Money from Circulation
4.Administer and make discount loans to banks in their districts
5.Evaluate proposed mergers and applications for banks to expand their activities
Functions of the Federal Reserve
(4 items)
1.Act a liaisons between the business community and the Federal Reserve System
2.Examine bank holding companies and state-chartered member banks
3.Collect data on local business conditions
4.Use staff's of professional economists to research topics related to the conduct of monetary policy
Role of Directors
(4 items)
1.Directors "establish" the discount rate
2.Decide which banks can obtain discount loans
3.Directors select one commercial banker from each district to serve on the Federal Advisory Council which consults with the Board of Governors and provides information to help conduct monetary policy
4.Five of the 12 bank presidents have a vote in the Federal Open Market Committee (FOMC)
Member Banks
(3 items)
1.All national banks are required to be members of the federal reserve system
2.Commercial banks chartered by states are not required but may choose to be members
3.Depository Institutions Deregulation and Monetary Control Act of 1980 subjected all banks to the same reserve requirements as member banks and gave all banks access to Federal Reserve facilities
Board of Governors
(5 items)
1.7 members headquartered in Washington, D.C.
2.Appointed by the president and confirmed by the senate
3.14 year non-renewable term
4.Chairman is chosen by the governors and serves a 4-year term
Duties of Board of Governors
(8 items)
1.Votes on conduct of open market operations
2.Sets reserve requirements
3.Controls the discount rate through "review and determination" process
4.Sets margin requirements
5.Sets salaries of president and officers of each federal reserve bank and reviews each bank's budget
6.Approves bank mergers and applications for new activities
7.Specifies the permissible activities of bank holding companies
8.Supervises the activities of foreign banks operating within the U.S.
Chairman of the Board of Governors
(4 items)
1.Advises the president on economic policy
2.Testifies in congress
3.Speaks for the federal reserve system to the media
4.May represent the U.S. in negotiations with foreign governments on economic matters
Federal Open Market Committee (FOMC)
(4 items)
1.Meets eight times a year
2.Consists of seven members of the Board of Governors, the president of the Federal Reserve Bank of New York and the presidents of four other Federal Reserve banks
3.Chairman of the board of governors is also chair of FOMC
4.Issues directives to the trading desk at the Federal Reserve Bank of New York
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