Federal reserve System Flashcards
(38 cards)
What is the 5 key function of federal reserve system (Control supervise write economic research)
Control money supply and credit in economy
Supervisory and regulatory role
Write and implement consumer protection laws
Services to foreign government and International agencies
Economic research
What are the 4 services provided by federal reserve (CCFA)
Collect and distribute notes and loans
Cheque processing (Central cleaning system)
Facilitate wire transfer of funds and securities worldwide
Automated clearing house
How do they control money supply and credit in economy?
Implements monetary policy of US (money supply and interest rates)
Buy and sell gov securities (T bonds)
Set discount rates
What is supervisory and regulatory role?
regulate the activities of all FIs in US
What services do Federal reserve provide to foreign gov and international agencies?
Operate accounts for US reserves deposited by foreign gov agencies
What economic research do federal reserves do
They gather and analyse wide range of economic data to monitor health of economy
What is the 3 tool of monetary policy
Reserve requirement (RR)
Discount rate
Open market operations
How does discount rates works?
When Discount rates is set very low, banks are able to borrow money easier. More money borrowed, MS increases. (when there is recession)
How does reserve requirement work?
When RR decreases, the money banks are able to borrow out increases, MS increases
How does open market operations work?
When there is inflation - Fed will sell gov bonds (T bonds) which would result in banks having less money to lend and less money would be in economy. MS decreases and inflation wil be cooled down.
Recession: Fed will buy bonds giving banks more money to lend out. MS increases and this will stimulate the economy
What are Conventional Monetary Policy tools used for
They are tools used to achieve economic goals of central banks
What is the goal of central bank?
Price stability goal
How do central banks achieve price stability goals? (5 tools HESIS)
High employment
Economic growth
Stability of financial markets
Interest rate stability
Stability in foreign exchange markets
Inflation targetting
Institutional commitment for price stability as primary, long run goal of monetary policy and a commitment to achieve inflation goals. Increase transparency of strat and increase accountability of central banks .
Asset bubbles
Increase in asset prices that is beyond fundamental values which eventually bursts
What is the 2 different types of asset bubbles?
Credit driven bubble
Bubble driven by irrational exuberence
What causes credit driven bubbles
When it is too easy to borrow money. If people can take loans so easily, asset prices will inflate beyond economic fundamentals
What causes bubbles driven by irrational exuberence
Usually happens in free market. This is when there is a market frenzy where people are extremely optimistic beyond economic realities.
Should central banks respond to bubbles?
SHOULD NOT PRICK BUBBLES unless asset price and credit risk increases at the same time.
DO NOT TOUCH bubbles caused by irrational exuberence.
What is macroprudential policy
A regulatory policy that affects what is happening to credit market in aggregate
It is when a central bank takes steps to protect the entire financial system
What is monetary policy?
Should not let credit driven bubbles proceed further and not do anything about it if the bubbles is out of control.
What is the 2 different interest rates
Nominal interest rates: makes no allowance for inflation
Real interest rates: Adjusted changes in price levels to inflation as well so it mroe accurately reflects the cost of borrowing.
What does the risk structure of interest rates refer to?
It refers to how interest rates vary between different type of bonds issued by different companies with the same dates and have different interest rates due to default risk and liquidity risk
What is default risk
Its the risk of probablity that the borrower is unable to pay interest or pay full value of the debt
