Chapter 13 the federal reserve system


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CHAPTER 13

THE FEDERAL RESERVE SYSTEM


  1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

1 moral suasion

  1. The FED’s most powerful tool.

  1. reserve requirements

  1. Legal reserves minus required reserves.

  1. discount rate

  1. Minimum differences between interest rates charged and received.

  1. excess reserves

  1. Interest rate banks have to pay the FED.

  1. open market operations

  1. Sets policies for trading in U.S. bonds to vary the money supply.

  1. margin requirements

  1. The FED’s most useful tool.

  1. financial efficiency

  1. Sets “down payments” on purchases of stock.

  1. Federal Open Market Committee

  1. Exercising persuasive powers to induce changed behavior.

  1. federal funds market

  1. Interbank lending of excess reserves.

  1. central bank

  1. Government’s bank and “lender of last resort.”



    1. Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

^ THE FEDERAL RESERVE SYSTEM

Chapter Objectives
After you have read and studied this chapter you should be able to describe the purposes of a central bank such as the Federal Reserve System (FED); discuss the FED’s primary and secondary tools and how these tools may be used; evaluate the effects of various regulations on the efficiency of the financial sector, and distinguish various types of financial intermediaries.
Chapter Review: Key Points

  1. Because fractional reserve banking makes it impossible for all banks to pay all demand deposits simultaneously, government action may help resolve monetary crises. The central bank of a country: (a) controls the volume of money in circulation, (b) performs the government's banking functions, (c) serves as a “bankers' bank,” and (d) regulates banks and other financial institutions. The central bank of the United States is the Federal Reserve System, or FED.

  2. The value of the potential money multiplier (mp) is the reciprocal of the reserve-requirement ratio (1/rr). Excess reserves in the financial system and cash holdings by the public are drains on the potential multiplier. The actual multiplier (ma) equals the monetary base (MB) – the currency and bank reserves issued by the FED divided into the money supply (MS): ma = MS/MB

  3. The ^ FED’s most powerful but least used tool is its control of reserve requirements (rr). Raising rr reduces money multipliers and the money supply, and vice versa.

  4. The most useful tool of the FED is open-market operations (OMO). After all adjustments, open-market operations affect the monetary base, not the money multiplier. When the FED sells bonds, both bank reserves and the money supply decline. FED purchases of bonds increase bank reserves and the money supply.

  5. The discount rate (d) is the interest rate the FED charges member banks. When the discount rate is low relative to market interest, banks hold fewer excess reserves and borrow from the FED. Consequently, the money supply grows. High discount rates relative to market interest rates cause banks to borrow less from the FED and to hold more excess reserves. The actual money multiplier and total bank reserves fall, and the money supply falls.




    1. ^ Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Денежные авуары населения; volume of money in circulation; взимать процентную ставку; charge member banks; следовательно; down payments; идти на убыль; demand deposit; норма дисконта; важнейший инструмент; purchases of stock; нормативные правовые акты; проводить различие; поделить на ; drains on the potential multiplier; продемонстрировать силу убеждения; vice versa; рынок федеральных фондов; relative to; предписываемая законом маржа; рыночный процент; value of the potential money multiplier; рекомендации банкам со стороны Федеральной резервной системы; Open-Market Operations (OMO); важнейший инструмент; Federal Open Market Committee; Федеральная резервная система ФРС; financial intermediary; частичные резервы; получать процентную ставку; a reciprocal; регламентировать (упорядочивать, контролировать); fractional reserve banking ; функции государственного банка; least used tool; оказывать влияние на денежную базу; after all adjustments; банк, обслуживающий другие кредитные институты (банк банков); обязательство государственного займа; induce changed behavior; частичные резервы; financial intermediary; держать мало избыточных резервов; interbank lending; норма ссудного процента; issue bank reserves; установленные законом нормы обязательных резервов банков; legal reserves; последняя кредиторская инстанция; purchases of stock; нормативные правовые акты; reserve-requirement ratio; разрешать денежно-кредитный кризис; secondary tool; совокупные банковские резервы; trade in U.S. bonds.
4 Translation from page.

Translate from page the passages expanding on the subject of the text.

^ STOP-AND-GO FED POLICIES

For decades, the U.S. economy has been plagued by faltering growth, variations in the dollar's exchange rate, and swings in rates of unem­ployment and inflation. Monetary growth has also been erratic. Are these facts connected? One group of new classical economists, the monetarists, cite inconsistent growth of the money supply as the basic cause of all these problems.

Such external shocks as the Vietnam War, conflict in the Persian Gulf, and OPEC oil price hikes may also partially explain cyclical swings, but most mone­tarists view attempts at economic fine-tuning as doomed. Indeed, many observers lay full blame for recessions from 1981 to 1983 and from 1990 to 1992 at the Federal Reserve's doorstep.

Uneven but growing inflation marked the 1970s. In 1979, the Fed announced that it would target M1 and con­trol its rate of growth. Since then, monetary growth and GDP growth continue to be on a roller coaster: up for a few quarters and then down for the next few. The Fed an­nounces targets, but then adjusts them when economic conditions seem to warrant different targets.

The drop in the rate of mon­etary growth between 1979 and 1980 was so abrupt that, although inflation decelerated, the economy went into a deep slump. Between 1986 and 1994, however, the Fed held monetary growth under a tight reign.

Discerning a pattern in the Fed's policies during the early 1990s requires more detective work. Most economists view low interest rates as critical for balanced invest­ment and economic growth. The Fed lowered its discount rate 25 times from 1989 to 1993. Federal deficits during the early 1990s were at record levels, so expand­ing the monetary base should have been easy: the Fed could simply absorb (monetize) substan­tial chunks of new federal debt by buying Treasury bonds. Then, readily available bank reserves would swell the money supply— after bankers made loans to investors. But this predicted chain of events failed to unfold.

The Fed regularly announces targets for monetary growth in the moderate range (2% to 6%), with precise targets depending on eco­nomic conditions. However, while unemploy­ment rates hovered between 6% and 8% during the recession of 1990-1992, the money supply (M2) fell below the Fed's targeted growth rates.

This slow growth represented a sharp departure from most eco­nomic recoveries since World War II, when the real (inflation-adjust­ed) money supply grew at an aver­age annual rate of 7%. Among possible explanations for sluggish monetary growth are the follow­ing:

1. The Fed bought too few Treasury bonds through its open markets operations, so the monetary base expanded too slowly.

2. Despite increased availability of bank reserves, banks, fearing widespread defaults, were reluc­tant to lend, and pessimistic investors were reluctant to bor­row during this recession.

3. Foreign financial investors responded to lower U.S. interest rates by transferring their funds to countries where interest rates were higher, reducing the funds available for lending by U.S. financial intermediaries. 2558 digits

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