Examine the nature of the fractional-reserve banking system in the United States, and discuss in detail the tools employed by the Federal Reserve (Fed) to manage the money supply. As you do so, address three of the following (and only three) assigned concepts in conjunction an assigned question:
- Concept: Open Market Operations (OMOs)
- Question: What is purpose of OMOs, and how does the buying and selling of US securities by the Fed influence the Federal funds market?
- Concept: Discount and Federal Funds Target Rates
- Question: What is the distinction between the discount rate and the Federal funds target rate? Are both rates directly controlled by the Federal Reserve?
- Concept: Required Reserve Ratio / Deposit Expansion (Money) Multiplier
- Question: How is the required reserve ratio related to the concepts of required and excess reserves? Also, how do changes in the required reserve ratio impact the deposit expansion (money) multiplier? Note: be sure to note the formula for the deposit expansion (money) multiplier.
- Concept: Fractional-Reserve Banking System
- Question: What is the economic purpose of a fractional-reserve banking system?
The key to the assignment is to demonstrate your knowledge of three of the assigned concepts. Assignments should be clearly organized, succinct, informative, coherent, and thoroughly based upon an analysis of the assigned concepts. Always keep in mind that the key to the assignment is to demonstrate your mastery of the three assigned concepts you select, the topic question(s) are included only to place your analysis of the assigned concepts into context. Don’t become overly concerned with the topic to the detriment of a detailed discussion of the assigned concepts.
