Chapter 16
Define monetary policy.
The actions the Federal Reserve takes to influence the level of Real GDP and the rate of inflation in the economy.
Explain the relationship between the money supply and interest rates.
The higher the interest rates, the more it costs to borrow money so less money will be used.
Explain the tight money policy.
A policy of the Federal Reserve that makes money and credit less available for higher interest rates.
Explain the easy money policy.
A policy of the Federal Reserve that makes money and credit plentiful and available for lower interest rates.
Explain the difference between the prime rate, federal funds rate and the discount rate.
Discount Rate- rate of interest the Federal Reserve charges for loans to commercial banks Federal Funds Rate- rate of interest charged on short term loans from one bank to another Prime Rate- rate of interest banks charge on short term loans to their best customers
Identify and explain how the Federal Reserve serves the federal government.
Federal Reserve serves as government banks and is responsible for implementing monetary policy, acts as a financial agent for the buying and selling of government securities (treasury bonds, notes, bills) and issues currency through them US Department of Treasury and coins through the US Mint for the government.
Identify and explain how the Federal Reserve serves banks and regulates the banking industry.
Federal Reserves serves by supervising lending practices, clears checks, and is the lender of last resort for banks. It regulates banking industry by conducting bank examinations to make sure laws and regulations are followed. Also tracks the reserve requirement (fractional a reserve system) or how much money is on hand in banks.
Identify and explain the three monetary policy tools.
Reserve Requirements- amount of money on hand in bank Discount Rate- amount of interest charged on loans to commercial banks Open Market Operations- involves buying and selling of government securities
Identify and explain the parts or components of the Federal Reserve System.
The Board of Governors- oversees the Fed Federal Advisory Committee- collects economic data for the board of governors 12 district reserve banks-monitors and reports economic data in the district member banks, the federal open market committee.
Explain the reasoning behind the creation of Federal Reserve
The Federal Reserve bank was created in 1913. Was established to restore confidence in banking system, regulate and supervise the banking system and act as a lender of last resort to avert bank panics.