| Chapter 13 Appendix Outline |
| I. THE MONEY CREATION PROCESS |
| A. Depository Institutions |
| 1. After credit-unions, commercial banks are the most numerous financial institution and account for most of the deposits. |
| a. Commercial banks are either national banks that are chartered by the
federal government or state banks that are chartered by state governments. |
| | 1. A national bank must belong to the Federal Reserve System. |
| B. The Federal Reserve |
| 1. A seven person Board of Governors oversees the Federal Reserve. |
| a. The members are appointed by the presidert for 14-year terms. |
| b. One member serves as chairman of the board for a four-year term. |
| 2. There are 12 Federal Reserve Districts, each with its own Federal Reserve Bank. |
| a. These banks provide services to commercial banks and other financial
institutions. |
| 3. The Federal Open Market Committee (FOMC) determines the nation's monetary policy. |
| a. The FOMC has 12 members: the seven members of the Board of Governors and five of the 12 Federal Reserve Bank presidents. |
| | 1. The president of the New York City Federal Reserve Bank is a permanent member of the FOMC; the other presidents serve on a rotating basis. |
| C. The Federal Reserve and the Money Supply |
| 1. Banks are required to hold a portion of their reserves against deposits. |
| a. These reserves are called required reserves. |
| b. The reserve requirement is the percentage of deposits banks must hold
as required reserves. |
| c. Excess reserves are those over and above required reserves. |
| 2. The Federal Reserve generally alters the money supply through open market operations, the buying and selling of U.S. Treasury securities. |
| 3. The Federal Reserve can create money by buying a Treasury security. |
| a. When the security is purchased, the seller deposits the money in his or her checking account. |
| | 1. Because demand deposits are a part of the money supply, this deposit will increase the money supply. |
| b. The bank loans part of the deposit. |
| | 1. This loan becomes deposits at other financial institutions, resulting in further increases in the money supply. |
| c. The maximum amount by which the money supply can change is equal to the change in reserves divided by the reserve requirement. |
| | 1. The money supply will change by the maximum mount only if depository institutions do not add to their holdings of excess reserves and the public does not add to its holdings of cash. |