Banking Reserves and Federal Reserve Operations Explained

The video explains how banks manage reserves and lend money, focusing on interbank lending and the role of the Federal Reserve. It details how the Fed uses open market operations to influence the economy by injecting cash and adjusting interest rates, impacting the yield curve.

What is the primary reason banks keep some money as reserves?

• To invest in stock markets

• To ensure they can meet depositor demands

• To pay employee salaries

• To buy real estate

Why might bank A lend money to bank B?

• Bank A is buying shares in bank B

• Bank B wants to invest in new technology

• Bank B is merging with bank A

• Bank A has excess reserves and bank B needs cash

What is one of the Federal Reserve's goals when it prints money?

• To increase taxes

• To increase inflation

• To stimulate the economy

• To reduce employment

What are open market operations?

• The process of banks merging

• The Federal Reserve buying and selling treasury securities

• Banks offering loans to the public

• The government setting tax rates

How does the Federal Reserve's open market operations affect the supply of cash in the banking system?

• It decreases the supply of cash

• It stabilizes the supply of cash

• It has no effect on the supply of cash

• It increases the supply of cash

What happens to the demand for cash when the Federal Reserve injects more cash into the banking system?

• Demand for cash becomes unpredictable

• Demand for cash remains unchanged

• Demand for cash decreases

• Demand for cash increases

What is the effect on interest rates when the supply of cash increases?

• Interest rates remain the same

• Interest rates decrease

• Interest rates increase

• Interest rates become volatile

What does a decrease in the short-term interest rate indicate about the yield curve?

• The yield curve flattens

• The yield curve becomes inverted

• The yield curve becomes steeper

• The yield curve remains unchanged

What is the typical duration for loans involved in overnight borrowing?

• One year

• One day

• One month

• One week

What is the primary purpose of the Federal Reserve's open market operations?

• To control inflation

• To increase government spending

• To regulate stock markets

• To manage short-term interest rates