Econ Exam 4
Buying and selling of government securities (or
- Buying and selling of government securities (or bonds). - Commercial banks and the general public. - Used to influence the money supply. When the Fed sells securities, commercial bank reserves are reduced. (4 main tools)
How are increase (decrease) in Nominal GDP related to money demand?
- When nominal GDP decreases, the demand for money shifts to the left - directly related -Increase in nominal GDP- Leads to inflation - Increase in demand / Need of cash/Money
How is the equilibrium interest rate determined and how is it shown graphically.
-Determined by the intersection of the demand for money and supply of money -The federal reserve is in charge of the supply of money and it is a vertical line on the graph
How many members can serve on the Board of Governors of the Federal Reserve System?
7
A bond with no expiration date has a face value of $10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to $11,000, the annual yield approximately equals
9 percent.
What are the 2 types of Monetary Policy and what are each of their goals.
Expansionary Monetary Policy (goal is to increase money supply and stimulate economy) Contractionary Monetary Policy (goal is to decrease the supply of money and slow down the economy).
What is the FOMC and what is their job
Federal Open Market Committee and they are in charge of open market operations and increasing or decreasing money supply. Aids Board of Governors in setting monetary policy Conducts open market operations
Who is in charge of the supply of money and graphically how is it shown on the Money Market
Federal Reserve
Unit of account
Goods valued in dollars thus it provides a consistent way to value business activity so comparisons can be made. ( 3 functions of money)
Who backs the US money supply?
Guaranteed by government's ability to keep value stable. "Uncle Sam"
Store of value
Hold some wealth in money form. . $20 today will still be $20 in a year from now ( 3 functions of money)
What was a contributing factor in the lending market that help cause the 2007-2008 financial crisis?
Increase in sub prime loans and the giving loans to anyone and bundling loans and selling them off to investors
What is larger M1 or M2?
M2 is about 5 times larger
Know how the Demand for money graph, investment demand graph and AD/AS graph are all connected.
Money market and Demand for loans are connected through interest rates Demand for loans and AS/AD are connected through the I part of GDP (investments)
Why wouldn't the Fed want to drive nominal interest rates below zero in response to a financial crisis and recession?
Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses.
If there is a rapid increase(decrease) in the supply of money what happens to the purchasing power?
Purchasing power goes down
After the 2008 financial crisis, why did the Federal Reserve effectively lose its ability to increase the money supply by manipulating the federal funds rate target?
The increase in excess reserves in the banking system virtually eliminated the need for banks to borrow in the federal funds market.
What is the transactional and asset demand for money? How are they graphically show and how do they make the total demand for money?
Transactional Demand The money you need to afford your bills or monthly budget - Determined by nominal GDP -Independent of the interest rate Asset Demand - Money as a store of value - Varies inversely with the interest rate for taking out loans
Medium of exchange
Used to buy and sell goods. ( 3 functions of money)
In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that
banks held on to excess reserves and people chose to pay off loans rather than spend.
During periods of rapid inflation, money may cease to work as a medium of exchange
because people and businesses will not want to accept it in transactions.
If the FED wants to decrease (increase) banks from lending what can it do?
decrease - Sell bonds Increase - lower the reserve requirements for banks,
The sale of government bonds by the Federal Reserve Banks to commercial banks will
decrease aggregate demand.
Which one of the following is considered to be a "stock" rather than a "flow" variable?
money
Monetary policy actions by the Fed are
more effective in a restrictive direction than they are in an expansionary direction.
Upon which of the following industries is a restrictive monetary policy likely to be most effective?
residential construction
The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for
setting the Fed's monetary policy and directing the purchase and sale of government securities.
How much did the U.S. Congress allocate to the Troubled Asset Relief Program in 2008?
$700 billion
When the fed buys (sells) bonds and increases (decreases) the supply of money what will banks do?
Buying bonds- Increase excess reserves and encourages banks to lend more money
What was a contributing factor in the lending market that help cause the 2007-2008 financial crisis?
Increase in sub prime loans and the giving loans to anyone and bundling loans and Securitization:
What is M1 money
Cash, checkable deposits, and traveler's checks
The Reserve Ratio
Changes the money multiplier. The discount rate: • The Fed as lender of last resort. • Short-term loans. Term auction facility: • Introduced December 2007. • Banks bid for the right to borrow reserves. (4 main tools)
If the FED is trying to stimulate the economy it will want to ____ the supply of money, which will cause interest rates to ___ and thus encourage more Lending lastly pushing the AD curve to the ___.
Increase, Fall, Right
How is your purchasing power and price level related.
Inversely related
What is the relationship between interest rates and bond prices?
Inversely related
. Interest on Reserves
Law changed in 2008. • 0% interest for deposits at the Federal Reserve Banks Allows banks to pay interest on excess reserves. • Interest on excess reserves (IOER) • 0.25% between 2008-2015 • 2.4% in April 2019 • 0.04% in April 2020 (4 main tools)
What is NOT in M1 money supply
Savings deposits including money market deposit accounts (MMDA). Small-denominated time deposits. Money market mutual funds (MMMF).
The Discount Rate
The Fed as lender of last resort • makes short-term loans to banks to cover unexpected and immediate needs for additional funds • All new reserves from loan are considered excess reserves • DR up-> discourages borrowing • DR down-> encourages borrowing (4 main tools)
Who is in charge of the money supply in the US?
The Federal Reserve
Which of the following best describes what occurs when monetary authorities sell government securities?
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.
The paper money, or currency, in the United States essentially represents
a debt of the Federal Reserve System.
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
a downsloping line or curve from left to right.
When economists say that money serves as a unit of account, they mean that it is
a monetary unit for measuring and comparing the relative values of goods.
Approximately how many commercial banks are now operating in the United States?
about 4,600
What are checkable deposits?
any demand deposit account against which checks or drafts of any kind may be written Institutions offering checkable deposits. Commercial banks Savings and loan associations Mutual savings banks Credit unions
Members of the Federal Reserve Board of Governors are
appointed by the president to staggered 14-year terms.
In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the
cyclical asymmetry of monetary policy.
Assume that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce
excess reserves by $200 million. the money supply by potentially $200 million.
The interest rate that banks charge one another on overnight loans is called the
federal funds rate.
What 2 main way can we stabilize the purchasing power of money, there are 2 main policies.
fiscal policy (tax and spending policies of the federal government) monetary policy (actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. )
It is costly to hold money because
in doing so, one sacrifices interest income.
Refer to the table, in which investment is in billions. Which of the following scenarios would be consistent with the occurrence of cyclical asymmetry?
the Fed lowering the interest rate from 7 to 6 percent, while investment demand changes from columns (1) and (2) to columns (1) and (3)
When a commercial bank borrows from a Federal Reserve Bank,
the commercial bank's lending ability is increased.
Checkable deposits include
the deposits held by banks and thrifts on which checks can be written.
As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system. This is because
there is a massive amount of excess reserves already in the banking system.
