The Federal Reserve System

Market price and its kinds

Let's disassemble following questions. What does market price represent? She plays what role adjustment of transactions between sellers and buyers?

Market price - this actual price which is established according to supply and demand of the goods. Depending on different conditions of purchase and sale of the blessings and services there are unequal kinds of the prices. They can be classified on certain primary groups.

1. Taking into account adjustment methods such kinds of the prices are allocated.

Free prices. They depend on a market condition and arrangements of the seller and the buyer are established without the state intervention, on the basis of free.

Contractual, or contract, the prices. Market makers establish them by a mutual consent till the moment of purchase and sale of the goods. In the agreement absolute values of the prices, and only top and bottom level of their changes can be specified not.

Adjustable prices. For separate groups of the goods the state establishes the top limit of the prices, to exceed which it is forbidden. In the conditions of market economy such pricing concerns the vital goods and services (strategic raw, energy carriers, public transport, consumer products of the first necessity).

The state fixed prices. State structures fix such prices in planned and other documents. Neither manufacturers, nor sellers have no right them to change.

2. Depending on forms and trade spheres following kinds of the prices are allocated.

Wholesale on which the big weights of the goods are implemented in wholesale trade. In our country at such prices the enterprises-manufacturers market the goods to other enterprises or desk jobbers.

Retail on which in home shopping service products are on sale to consumers.

Tariffs for services - the prices (quotation) establishing level of payment of municipal and household services for using by phone, radio, etc.

3. The exchange and auction prices are formed on the different concrete market forms concerning type of a free market. About their character and formation methods we will in detail talk further.

4. The world market prices - the prices, which: were actually established on the goods of the given group in the world market and are recognised by the organisations knowing world trade, for the certain period.

The Federal Reserve System

VOCABULARY

policy — a plan that determines how an organization will act in certain situations

uniform — always the same, unchanging

to set — to fix, establish

reserve requirements — percentage of total deposits that a bank keeps in cash

mandatory — obligatory, required, has to be done

ratio — proportion; a fixed relationship between two similar things

holdings — property owned; assets

advances — money paid before goods or services are received

rediscount — a negotiable instrument which has been discounted by a bank and then sold a second time to a Federal Reserve Bank and discounted again by that bank

to empower — to authorize, to give power or authority to someone

open-market — public sale of securities

security — stock or bond (see definitions, below)

to purchase — to buy; buying

investments — the money placed to purchase some kind of property with the hope of making a profit; the properties themselves that the money has been invested in

bill of exchange — an order drawn by one person on another, directing him to pay money to a third person or to his account and to charge the person who draws the order

acceptance — a bill of exchange marked "accepted"

market price — the current price

margin requirements — the percentage of the market price of securities that the buyer must pay when he borrows the money to purchase those securities

capital — money or wealth used in business

stock — a share of corporate capital

stock certificate — written evidence of ownership of stock

bond — an interest-bearing certificate of debt

Expansion

Board of Governors — a group of administrators or directors of the United States Federal Reserve System (also known as the Federal Reserve Board)

The Board of Governors sets uniform banking policies.

intervention — interference in the affairs of others; changing the normal direction of' a transaction

There have been many complaints recently about government interference in the purchase and sale of securities.

volume of activity — amount of buying and selling

stock exchange — a place where stocks and bonds are regularly bought and sold

The volume of activity on the stock exchange has been very high this past week.

discount — the interest deducted from the face value of a note at the time a loan is made; the borrower receives the net amount after the discount has been deducted

Vocabulary Practice

Select the answer that correctly completes each sentence. Note: first read passage, and then complete this exercise

1. The Federal Reserve Board influences the volume of activity on the _____________ .

a. Board of Governors b. rediscounting rate c. Stock Exchange

2. The Board of Governors can buy or sell United States Government _____________ .

a. reserve requirements b. securities c. liabilities

3. _____________ of the twelve Federal Reserve Banks are uniform.

a. bonds b. policies c. advances

4. When margin requirements are set on the Stock Exchange, the ____________ of stocks and bonds bought with loans is affected.

a. market price b. advances c.open-market operations

5. Federal Reserve Banks are involved in the purchase and sale of ____________ .

a. bills of exchange b. rediscounts c. ratios of holdings

THE FEDERAL RESERVE SYSTEM

The Federal Reserve System of the United States performs many of the functions of the Central Bank of other countries. Te territory of the United States is divided into twelve Federal Reserve Districts, each one of which has a Federal Reserve Bank in a major city. Policies of these twelve banks are uniform however, because they are set by the Board of Governors of the Federal Reserve System.

It is precisely this Federal Reserve Board that carries out operations similar to those that are the responsibility of Central Banks in Europe, Latin America and elsewhere. For instance, member banks are told by the Federal Reserve Board what current reserve requirements are that is the mandatory cash ratio of holdings to liabilities. Federal Reserve Banks may extend credit to member, banks through advances or rediscounts. The rediscounting rate is set by each of the individual member banks. The Board is also empowered to conduct certain open-market operations that can affect the money supply of the United States. For instance, the Board can buy or sell United States Government securities, thus increasing or decreasing the amount of money in circulation. Other open-market interventions of the Federal Reserve Banks include the purchase and sale of investments such as bankers' acceptances and bills of exchange.

The Federal Reserve Board can also influence the volume of activity on the stock Exchanges by setting margin requirements for the purchase of securities. In other words, the Federal Reserve Board can set the percentage of the market price of securities that a buyer must pay when buying stocks or bonds with a loan. Margin requirements thus limit the amount of credit that purchasers of securities may be given to finance their investment activity. By raising or lowering margin requirements, the Federal Reserve Board may limit or expand the volume of stock purchases.

Comprehension Check

A.State whether each of the following sentences is true or false based reading passage

1.There are twelve Federal Reserve Banks in the United States.

2.The Board of Governors of each Federal Reserve Bank sets its own policies.

3.The actions of the Federal Reserve System affect the amount of money in circulation in the United States.

4.Federal Reserve Banks are not empowered to buy and sell investments.

5.Margin requirements set by the Federal Reserve Board limit the amount of credit available to purchasers of stocks and bonds.

B. Answer the following questions

1.How many Federal Reserve Banks are there in the United States?

2.Who sets the policies of these banks?

3.How do Federal Reserve Banks extend credit to member banks?

4.How does the Board of Governors influence the money supply of the United States?

5.What can the Board of Governors do with United States Govern securities?

6.What can Federal Reserve Banks buy and sell?

7.How does the Federal Reserve Board influence the volume of activity on the Stock Exchange?

8.What do margin requirements limit?

9.What are reserve requirements?

10.Which institution performs the functions of the United States Federal Reserve System in your country?

C. Composition. Write a paragraph comparing and contrasting the Federal Reserve System of the United States with the Central Bank or equivalent institution that performs this role in your own country.

Building Your Vocabulary

A. Matching. Find the words in the right-hand column that are closest meaning to the words in the left-hand column

B. Rewriting each of the following sentences replacing the underlined word or words with the correct form of one of the new words of this lesson

Model: The Board of Governors sets the obligatory cash ratio of holdings to liabilities.

The Board of Governors sets the mandatory cash ratio of holdings to liabilities.

1. Policies of the twelve Federal Reserve Banks are the same everywhere.

2. A group of administrators fixes the policies.

3. He has many properties bought for profit.

4. The amount of money in circulation varies with the buying and selling of stocks and bonds.

5. There has been a great amount of buying and selling on the stock exchange.

2 Organization of the Federal Reserve System

5.800 member bunks. Together, these compo­nents make decisions that have far-reaching effects on our economy and our lives.

The Federal Reserve System — or the Fed, as it is commonly called — was established by Con­gress in 1913. Prior to that time, there were several severe financial panics during which many businesses failed and many banks were forced to close. The national banking system that existed at that time was ill-equipped to deal with such crises, and it was decided that major reforms were needed. The result of these reform efforts was the Federal Reserve Sys­tem.

The Fed consists of three levels of organization. At the very top of the organizational structure are the Board of Governors, the Federal Open Market Committee, and the Federal Advisory Council. The second level consists of 12 Federal Reserve Banks scattered throughout the United States. The third level is made up of approximately The Board of Governors, which is the central policy-making body of the Federal Reserve Sys­tem, is responsible for supervising the overall operation of the Fed and for formulating and carrying out monetary policy. It consists of sev­en members — prominent bankers, economists, and business executives —appointed by the President of the United States and confirmed by the Senate. Each member is appointed for a 14-year term and is ineligible for reappointment. The terms of the seven members are staggered so that a new member is appointed by the President every two years. The President also appoints one of the seven members as chairperson of the Board for a term of four years.

In actuality, many of the Board's members do not complete their entire 14-year terms. Many resign because of their age or to pursue other interests. Although Board members can be removed for not doing their job satisfactori­ly, none have ever met this fate. The average term completed by Board members is between five and six years.

The members of the Board of Governors are seven of the most powerful people in the nation in terms of the effect their decisions have on the economy. It is extremely important that their decisions not be influenced by partisan politics. The creators of the Federal Reserve were aware of this danger and took precautions to prevent this from happening. For one thing, Board decisions do not have to be approved by the President or Congress. In addition, because Board members serve long terms and are ineli­gible for reappointment, they do not have to fear losing their jobs because a new President has been elected. As a result, the Board of Gov­ernors remains relatively independent of poli­tics.

Federal Open Market Committee

The Federal Open Market Committee is made up of 12 members — the seven members of the Board of Governors and five presidents of Fed­eral Reserve Banks. This committee is respon­sible for directing the buying and selling of gov­ernment securities in the open market in order to influence interest rates and the availability of credit. We will discuss the activities of the

Open Market Committee in more detail later in die chapter.

Federal Advisory Council

The Federal Advisory Council consists of 12 commercial bankers, with one member select­ed by each of the 12 Federal Reserve Banks. As the name implies, the duties of this council are strictly advisor. It meets periodically with the Board of Governors to report on general busi­ness conditions throughout the nation and to give the Board advice about future banking pol­icy. Although this council performs an impor­tant service by providing a link between bank­ers and the Board, in reality it has virtually no power and little impact on the way the Fed carries out its day-to-day activities.

Date: 2014-12-28; view: 1055