Chapter 15.1, Problem 1R

To determine

To evaluate: The significance of Fed, monetary policy, Federal Open Market Committee (FOMC) and check clearing.

Explanation of Solution

The central bank of the United States is called the Federal Reserve System (FRS), and perhaps the most influential financial institution in the world, designed to provide the country with a secure, flexible, and stable political and financial system. The FRS is composed of twelve regional Federal Reserve Banks each accountable for a different United States geographic area. The program is also called the Fed.

Monetary policy consists of the mechanism for drawing up, announcing, and executing the central bank, currency board, or other qualified monetary authority of a country's action plan that governs the amount of money in an economy and the outlets through which new money is generated.

The “Federal Open Market Committee” is a branch of the Federal Reserve Board that specifically determines the direction of monetary policy by guiding open market operations (OMO). The Committee consists of twelve members: the Chairman, seven FRB Governors appointed by Congress, and four Regional Fed Chairs.

Check clearing is essentially a mechanism by which funds transfer from one account to another to settle a payment of checks. Generally, the sum is credited to the deposit bank account, and an equal amount is debited at the bank from which it is paid. In the check clearing process, the local checks or local drafts deposited in the payee's bank are submitted for the payment at the payer's bank.

Economics Concept Introduction

Introduction: A dealing in very short-term debt securities is called a money market. It involves huge transactions at the level of wholesale among banks and traders. At the retail stage, it involves money market mutual funds purchased by single shareholders and money market accounts opened by customers of the bank.