ECON 3320 Chapter 15

How are open market operations implemented?

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Why is stability of foreign-exchange rates important to economic success?

A stable dollar simplifies planning for commercial and financial transactions.

What is the Federal Reserve's dual mandate?

Fed's dual mandate are two goals which are: i. Price stability ii. Maximum employment

Why is stability of interest rates important to economic success?

Increases and decreases in interest rate make it hard for firms to plan investments in plant and equipment and make households more hesitant about long-term investments in houses.

What are the specific benefits of economic growth?

Provides the only source of sustained real increases in household incomes.

The natural rate of unemployment ignores frictional and structural unemployment. What do economists believe its approximate value is?

They do not know the exact value of natural rate, but they believe its between 5% and 6%.

Why is stability of financial markets and institutions critical to economic success?

a. Firms with the potential to produce high-quality goods and services cannot obtain the financing they need to design, develop, and market these goods and services. b. Savers waste resources looking for satisfactory investments.

List and briefly describe the six (6) goals of monetary policy.

a. Price Stability: fluctuations of inflation make price less useful as signals for resource allocation. b. High Employment: Unemployed workers and underused factories and machines lower an economy's output. c. Economic Growth: increases in the economy's output of goods and services over time. d. Stability of Financial Markets and Institutions: When they are not efficient in matching savers and borrowers, the economy loses resources. e. Interest Rate Stability: fluctuations in interest rates make planning and investment decisions difficult for households and firms. f. Foreign-Exchange Market Stability: limited fluctuations in the foreign-exchange value of the dollar.

What is the difference between structural unemployment and cyclical unemployment? Which one can the Fed help with and how?

a. Structural unemployment is the unemployment that is caused by changes in the structure of the economy, such as shifts in manufacturing techniques, increased use of computers, and increases in the production of services instead of goods. b. Cyclical unemployment is unemployment associated with business cycle recessions. The Fed help to lower this one.

What did the Balanced Growth Act of 1978 (aka Humphrey-Hawkins) do? What event(s) preceded it (Look beyond the textbook)

a. The Employment Act of 1946 has been constantly ignored, so Hubert Humphrey wanted the US to adopt legislation that would enumerate more explicit employment goals, and if those goals were not met, to have the government provided jobs to achieve target. b. In 1978, the Balanced Growth Act was established, which stated that unemployment should not exceed 3% for people 20 years or older, and inflation should be reduction would not interfere with the employment goal.

What did the Employment Act of 1946 do? What event(s) preceded it? (Look beyond the textbook)

a. The Employment Act of 1946 is to lay the responsibility of economic stability of inflation and unemployment onto the federal government. b. When hundreds of thousands of American soldiers returning home from World War II, a large share of workforce concerned about finding jobs as the economy transitioned from the production of wartime goods, and the specter of the Great Depression fresh in the minds of the nation, Congress passed the Employment Act of 1946.

What is the current rate of unemployment? How does unemployment differ across education levels? (You will need to look outside the textbook to answer these two questions)

a. The current unemployment rate is 3.7%. b. The unemployment rate in the USA with less than a high school diploma is 7.6%. c. Unemployment rate is the USA with Bachelor's degree and higher is 2.3%.

What two new tools did they "invent" during the Financial Crisis?

a.Interest on reserve balances. b.Term deposit facility.

What is the Fed's three traditional monetary policy tools? Be sure to explain how each one affects the economy.

a.Open market operations: The Fed's purchases and sales of securities, usually U.S. Treasury securities, in financial markets. i. The Fed began purchasing a wider variety of securities to affect long-term interest rates and to support the flow of credit in the financial system. b.Discount policy: the policy tool of setting the discount rate and the terms of discount lending. i. Congress passed the Federal Reserve Act in 1913 they expected that discount policy would be the Fed's primary monetary policy tool. c.Reserve requirement: the regulation requiring banks to hold a fraction of checkable deposits as vault cash or deposits with the Fed. i. The required reserve ratio is a determinant of the money multiplier in the money supply process.