Class notes
Financial Banking Lecture notes - Central Banks and the Federal Reserve System
- Course
- Institution
Financial Banking Lecture notes - Central Banks and the Federal Reserve System
[Show more]
Seller
Follow
atany1998
Content preview
Central Banks and the Federal Reserve SystemThe Structure of the Federal Reserve System:
The system as it exists now includes:
- The Twelve Federal Reserve Banks
- Board of Governors of the Fed Reserve System
- Federal Open Market Committee (FOMC)
- Federal Advisory Council
- Member banks (around 2000)
The FOMC makes decisions regarding open market operations, to influence the monetary base.
Open market operations are the most important tool that the Fed has for controlling the money
supply (along with reserve requirements and the discount rate). All actions are directed by the
Federal Reserve Bank of New York, where securities are bought and sold as required.
Open market operations:
Open market operations are the most important monetary policy tool because they can change the
reserves in the banking system and interest rates. The purchase of securities can lead to
expansionary monetary policy. For example, if the Fed purchases $100 million of bonds, the Fed will
add $100 million to the dealer’s deposit account to the Fed. This causes the reserves for the banking
system to increase by $100 as these are deposits that the seller will put into the banking system, and
is therefore an asset. The Fed will gain $100 million in assets in terms of securities, however they will
also have $100 million worth of liabilities as these are reserves that people have deposited into the
system, but will have to be paid back at some point. The T-accounts for the banking system and the
Fed can illustrate this:
If the Fed sells securities, it is a contractionary monetary policy and leads to a contraction of reserves
and deposits in the banking system, and hence to a decline in the monetary base and the money
supply. This is because the banking system will gain $100 million securities, however it will lose $100
million worth in reserves, and so the monetary base will decrease as the banking system loses $100
million and the Fed gains $100 million as reserves for their assets.
The Federal Reserve can also affect the amount of reserves by making a discount loan to the bank.
For example, if the Fed makes a $100 million discount loan to the First National Bank, the Fed will
credit $1000 million into the bank’s reserve account (this is the money the bank is borrowing).
Therefore the bank will gain $100 million of reserves as assets, however these will also be a liability
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller atany1998. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.67. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
72042 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now