Question

Match the items.

1. The interest rate the Fed charges on loans of reserves to banks.
2. Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves.
3. A private market in which banks lend reserves to each other for less than 24 hours.
4. The interest rate banks charge for overnight loans of reserves to other banks.
5. A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed.
6. The Federal Reserve’s use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1).
7. The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold. The money multiplier is equal to 1 divided by the required reserve ratio.
8. The buying and selling of government securities by the Federal Reserve System.
9. The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
10. The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
11. A monetary policy tool created in 2007 during the financial crisis to encourage banks to borrow reserves and thereby extend new loans. Under this program, banks in sound financial condition are allowed to make interest rate bids for shortterm collateralized Federal Reserve loans.
a. discount rate
b. excess reserves
c. federal funds market
d. federal funds rate
e. fractional reserve banking
f. monetary policy
g. money multiplier
h. open market operations
i. required reserve ratio
j. required reserves
k. term auction facility (TAF)

Answer 1

1. Discount rate
2. Excess reserves
3. Federal funds market
4. Federal funds rate
5. Fractional reserve banking
6. Monetary policy
7. Money multiplier
8. Open market operations
9. Required reserve ratio
10. Required reserves
11. Term auction facility

Explanation:

1. The discount rate is the interest rate fixed by the federal reserve bank to lend to other banks.
2. The excess reserve is the part of reserve held by the banks which are in excess of required reserves.
3. Federal funds market is the market for borrowing funds for a short period of overnight.
4. The rate of interest charged in this market is termed as federal funds rate.
5. The frictional reserve is the most common lending method used by banks worldwide. In this system, banks keep only a part of total deposits in cash form and loans the rest.
6. Monetary policy is the policy used to affect the money supply in the economy. The tools used in monetary policy are open market operations, required reserve ratio, etc.
7. Money multiplier represents the amount of money banks are able to generate with each dollar of reserves.
8. Open market operation is the term used to define the buying and selling of government securities by the federal reserve system as a method to affect money supply.
9. The fraction of total reserves that a bank is required to keep in hand to pay to depositors is called required reserve ratio.
10. The minimum balance that is to be maintained by a commercial bank is called the required reserve.
11. The term auction facility is a short term program which is used to increase liquidity in the credit market in the US.