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The Federal Reserve System

2). One of the strengths of Fedpoint 45 is the direct, easy-to-understand explanation it offers of basic reserve requirements.

The Federal Reserve requires that all member banks maintain non-interest bearing reserve deposits based on a percentage of their transaction balanced at the district Federal Reserve Bank. Reserve requirements refer to the percentage of deposits that a bank or other depository institution must either hold as vault cash or on deposit at a Federal Reserve Bank. This money may not be lent or invested. The discount rate is the interest rate that Federal Reserve Banks charge for short-term loans to its members. However, changes in the discount rate act as a signal of the Federal Reserve's intention to change interest rates. The Federal Reserve is responsible for the buying and selling of government securities. The federal reserve is also the official buyer and seller of foreign currencies and holds gold deposited in the U.S. by other countries.

The Monetary Control Act (MCA) of 1980 authorized the Federal Reserve Board to impose a reserve requirement of 8 percent to 14 percent on transaction deposits and up to 9 percent on nonpersonal time deposits. The Federal Reserve may impose a reserve requirement of any size on the amount depository institutions in the U.S. owe, on a net basis, to their foreign affiliates or to other foreign banks. MCA also provided that only 3 percent reserve would be required for the first $25


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