Extra Credit (Spring 2010)


Board of Governors—the central, governmental agency of the Federal Reserve System, located in Washington, D.C., and composed of seven members who are appointed by the U.S. president and confirmed by the Senate. The Board of Governors is responsible for domestic and international economic analysis; with other components of the System, for the conduct of monetary policy; for supervision and regulation of certain banking organizations; for operation of much of the nation's payment system; and for administration of most of the nation's laws that protect consumers in credit transactions.

Discount rate—the interest rate charged to commercial banks when they borrow from the Fed overnight to meet their reserve requirements. Each Federal Reserve Bank's board of directors makes a discount rate recommendation that needs to be approved by the Board of Governors.

Excess reserves—the amount of reserves banks hold in excess of their reserve requirements and required clearing balances.

Federal funds rate—the interest rate at which a depository institution lends immediately available funds to another bank overnight.

The Federal Open Market Committee (FOMC)—a twelve-member committee made up of the seven members of the Fed's Board of Governors, the president of the Federal Reserve Bank of New York, and, on a rotating basis, the presidents of four other Reserve Banks. The FOMC has eight scheduled meetings each year to set monetary policy (typically by setting the federal funds target rate). It also establishes policy relating to Federal Reserve System operations in the foreign exchange markets.

Inflation—a sustained increase in the general level of prices, which is equivalent to a decline in the value or purchasing power of money. If the supply of money and credit increases too rapidly over too long of a time period, the result will be inflation. With inflation a dollar buys less and less over time.

Monetary policy—the method by which the Federal Reserve System influences the amount of money and credit available in the economy by purchase and sale of government securities in the open market.

Money supply—(also referred to as the money stock or simply money) the total quantity of money available for transactions and investment; measures of the U.S. stock include M1, M2 ,and M3. M2 is a measure of the U.S. money stock that consists of M1 (coins, paper currency, travelers checks, demand deposits, and other checkable deposits) and certain overnight repurchase agreements and certain overnight Eurodollars; savings deposits (including money market deposit accounts); time deposits in amounts of less than $100,000; and balances in money market mutual funds (other than those restricted to institutional investors). The monetary base (also known as the money base) is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically includes only the most liquid currencies.

Open market operations—The buying and selling of U.S. government securities (federal agency and mortgage-backed). The term "open market" means that the Fed doesn't decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an open market in which the various securities dealers that the Fed does business with—the primary dealers—compete on the basis of price. Open market operations are flexible and thus the most frequently used tool of monetary policy.

Required reserves—funds that banks must maintain as vault cash or on deposit with a Federal Reserve Bank; the required amount varies according to required reserve ratios set by the Board of Governors and the volume of reservable liabilities by the banks.

Reserve requirements—the percentage amounts of total deposits (assets) that banks must set aside either in their vaults or on deposit at a Federal Reserve Bank. The amount is set by the Board of Governors (reserve limits are set by law). (They are a fraction of a bank's transaction deposits, that is, checking accounts.)

Treasury securities—interest-bearing obligations of the U.S. government issued by the Treasury Department as a means of borrowing money to meet government expenditures not covered by tax revenues.

Source: Definitions were derived from Glossary, FederalReserveEducation.org.

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