Reserve Requirements and Credit Expansion

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What is the primary purpose of reserve requirements for depository institutions?

To increase the amount of loans made to the public

To reduce the overall money supply in the economy

To ensure depository institutions hold a certain amount of vault cash and reserves (correct)

To provide a source of funds for borrowing institutions

What happens to the total reserves of depository institutions when the Fed grants loans from the discount window?

They decrease by the amount of the loan

They increase by the amount of the loan (correct)

They remain unchanged

They decrease by half the amount of the loan

What is the effect of increasing reserve requirements on the economy?

It has a multiplicative effect on the economy, reducing the total amount of loans made (correct)

It has no effect on the economy

It leads to an increase in the money supply

It has a direct and positive effect on economic growth

What is the primary credit rate set at, relative to the federal funds rate?

At a rate slightly higher than the federal funds rate Signup and view all the answers

What was the recent change made to the discount window by the Federal Reserve?

The replacement of existing loan types with primary and secondary credit Signup and view all the answers

What is the purpose of the primary credit loan type?

To provide loans to sound borrowing institutions at a rate slightly higher than the federal funds rate Signup and view all the answers

What is the purpose of reserve requirements in the banking system?

To ensure that financial institutions have a sufficient amount of funds set aside Signup and view all the answers

What happens when central banks raise reserve requirements?

Financial institutions must set aside more funds as required reserves Signup and view all the answers

Why do central banks rarely change reserve requirements?

Because the impact on credit expansion is powerful and difficult to reverse Signup and view all the answers

What is the primary source of funding for the central bank?

Sales of its services and securities trading Signup and view all the answers

What is the effect of lowering reserve requirements on interest rates?

Interest rates tend to decline Signup and view all the answers

What happens to the money available for new loans when reserve requirements are raised?

It decreases Signup and view all the answers

What is the primary function of the Discount Window in each Federal Reserve Bank?

To receive requests to borrow reserves from banks and other depository institutions Signup and view all the answers

What happens to the total reserves when the Fed loans $200 million in reserves from the discount window?

Total reserves will increase by $200 million Signup and view all the answers

What is the rate charged on loans from the Fed to depository institutions called?

Discount rate Signup and view all the answers

What is the purpose of reserve requirements?

To ensure depository institutions hold a minimum amount of vault cash and deposits at the Federal Reserve banks Signup and view all the answers

What happens to loans and deposits when the Fed loans $200 million in reserves from the discount window?

Loans and deposits will rise by a multiple of the increase in reserves Signup and view all the answers

Why do central banks, like the Federal Reserve, use changes in reserve requirements as a monetary policy tool?

To influence the money supply and interest rates Signup and view all the answers