Central Banking and the Federal Reserve System, Part 9
Question 1: Discuss required reserve ratios.
Answer 1: The Federal Reserve’s primary responsibility is to control the amount of money in the American economy. One of the ways the Fed accomplishes this task is by establishing minimum amounts (expressed as a percentage of deposits) for bank reserves. . In other words, every bank and thrift institution must keep a certain percentage of its deposits as reserves, in case there is a large withdrawal from the bank. Every type of deposit requires different required reserve ratios. The larger the deposit type, the larger the percentage each bank is required to keep in reserve.
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Question 2: Discuss the discount rate.
Answer 2: One of the ways the Federal Reserve regulates the amount of money in the American economy is by manipulating the discount rate. The Federal Reserve loans money to commercial banks that need funds to meet the required reserve ratio. The discount rate is the interest rate at which the Fed loans this money. In order to change the discount rate, one of the twelve regional Federal Reserve Banks to the Federal Open Market Committee initiates a proposal. If the Federal Open Market Committee approves the change, it passes the recommendation on to the Board of Governors. The Board of Governors makes the final decisions regarding changes in the discount rate.
Question 3: Describe open market operations.
Answer 3: One of the ways that the Federal Reserve System adjusts the amount of money in the American economy is by buying and selling government securities, a process known as open market operations. The Fed sells government securities, including United States Treasury bills and bonds, to banks and private interests. When the Federal Reserve sells government securities, it reduces the amount of money in the American economy. When the Federal Reserve buys back government securities, it increases the amount of money in the American economy. The Federal Reserve does not sell government securities to other federal government organizations.
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