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Ch 20. Money, Financial Institutions, and the Federal Reserve (The five…
Ch 20. Money, Financial Institutions, and the Federal Reserve
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Two of the most critical issues in the United States today, depend on the ready availability of money.
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The money supply is the amount of money the Federal Reserve makes available for people to buy goods and services. And, yes, the Federal Reserve, in tandem with the U.S. Treasury, can create more money if it is needed.
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The Global Exchange of Money What makes the dollar weak (falling value) or strong (rising value) is the position of the U.S. economy relative to other economies. When the economy is strong, the demand for dollars is high, and the value of the dollar rises. When the economy is perceived as weakening, however, the demand for dollars declines and the value of the dollar falls.
A falling dollar value means that the amount of goods and services you can buy with a dollar in global markets decreases.
A rising dollar value means that the amount of goods and services you can buy with a dollar goes up.
The Fed buys and sells foreign currencies, regulates various types of credit, supervises banks, and collects data on the money supply and other economic activity.
The Federal Reserve System consists of five major parts. Federal Reserve is not a part of the U.S. government, despite its name. It is a private firm not supported by taxpayer dollars.
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The three basic tools the Fed uses to manage the money supply are reserve requirements, open-market operations, and the discount rate HOW THE FEDERAL RESERVE CONTROLS THE MONEY SUPPLY
Finally, it lends money to member banks at an interest rate called the discount rate.
The Fed has often been called the bankers’ bank because member banks can borrow money from the Fed and pass it on to their customers in the form of loans. The discount rate is the interest rate the Fed charges for loans to member banks.
The discount rate is one of two interest rates the Fed controls. The other is the rate banks charge each other, called the federal funds rate which is the interest rate financial institutions charge when they lend to other financial institutions overnight
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As part of monetary policy, the Fed determines the reserve requirement, that is, the level of reserve funds all financial institutions must keep at one of the 12 Federal Reserve banks.
The reserve requirement is a percentage of commercial banks’ checking and savings accounts they must keep in the bank (as cash in the vault) or in a non-interest-bearing deposit at the local Federal Reserve district bank. The reserve requirement is one of the Fed’s tools. When it increases the reserve requirement, money becomes scarcer, which in the long run tends to reduce inflation
An increase in the money supply can stimulate the economy to achieve higher growth rates, but it can also create inflationary pressures.
A decrease of the reserve requirement, in contrast, increases the funds available to banks for loans, so they can make more loans, and money tends to become more readily available.
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