FED

FED

The Fed

1. control money supply
2. issue paper currency
3. set reserve requirements and hold reserves of banks
4. lend money to banks & charge them interests
5. acts as personal bank for government
6. supervises member banks

Reserve Requirement
- The FED requires banks to always have some money readily available to meet consumers' demand for cash
- The amount set by the FED is required reserve ratio
- The RRR is the % of demand deposits (checking account balances) that must not be loaned out
- typical RRR = 10%

 Types of Multiple Deposit Expansion Question

1. Type 1 - Calculate initial change in excess reserves, aka amount a single bank can loan from initial deposit
2. Type 2 - Calculate change in loans in banking system
3. Type 3 - Calculate change in money supply

Type 2 & 3 may have same results ( no FED involvement)

Bank Liabilities

• Demand Deposits (DD) are cash deposits from the public
• Owner's Equity or Stock Shares are values of bank stocks as held by the public

Bank Assets

• Required Reserve (RR), the percentage of DD required to be stored in the Vault
• Excess Reserves (ER), the remaining % of DD after RR, that is used for loans
• Property, or bank property value statement

Fed Bonds can move in two ways:

1. The Fed sells them to banks and increases amount
2. The Fed buys them from banks and decreases amount