Money and Banking Term Paper

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monetary multiplier?

The economics textbook definition of the "money multiplier" assumes lending banks automatically expand their credit money supply to a multiple of their aggregate, or saved reserves of money. The Federal Reserve requires all banks, after the crash of 1920, to keep a certain amount of money in reserve in relation to the money lent by the bank. In the U.S. The required reserve ratio usually hovers around ten percent, implying that the money supply should be about ten times larger than the aggregate reserves of banks. The significance of the multiplier is that the more banks are required to keep in reserve; theoretically the less they will be able to lend. Thus, in its basic form, that multiple is equal to the reciprocal of the required reserve ratio. The theory behind the requirement also assumes the FED issues loans in compliance with the multiplier, although this is often not the case. However, some economics believe that although predicative after the fact, because the multiplier varies so little in the U.S., it has little present predicative power before loans are issued. (Hummel, 2004)

The FED rarely changes the reserve requirement. In fact, it is the least used monetary policy tool because changes in the reserve requirement significantly affect the way financial institutions operate. Reserve requirement changes are seen as a sign that monetary policy has swung strongly in a new direction. (EEP, 2003)

What are the components and the functions of all of the Federal Reserve System?

The Federal Reserve System is controlled by a federal governmental agency known as the Board of Governors, located in Washington, D.C. The FED has twelve regional banks located in major cities throughout the nation.

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The two major governing components share responsibility for supervising and regulating certain financial institutions and activities. From a financial perspective, they provide banking services for depository institutions and to the federal government. Legally, they are responsible for ensuring consumers receive adequate information and fair treatment in their business with the banking system. A major component of the System is the Federal Open Market Committee (FOMC), made up of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and rotating presidents of four other Federal Reserve Banks. This branch oversees open market operations, the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit. (FED, 2004)

What are the tools that are available to handle either recession or inflation?

The major tools at the FED's disposal to control the economy are manipulation of the money supply, raising and lowering the discount rate and the interest rates, and sales of government securities. As the money supply grows, so does the demand for goods and services. When more money is available spend, consumers spend more. When the production of goods and services can't keep up with the growth in….....

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