Macro Chapters 14 & 15

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How long are the members of the Federal Reserve Board appointed for?

14 year terms

When was the Federal Reserve System created?

1913

Who does the Federal Open Market Committee (FOMC) include?

7 Board of Governors members, president of the New York Federal Reserve bank, and the 4 remaining presidents from 11 remaining Federal Reserve banks serving on a 1 year rotating basis

What is the Federal Open Market Committee (FOMC) made up of?

7 members of the Board of Governors, president of the New York Federal Reserve bank, and the 4 other federal reserve bank presidents on a rotating basis

The Federal Reserve System consists of which of the following?

Board of Governors and the 12 Federal Reserve Banks

Which group sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, bonds)?

Federal Open Market Committee (FOMC)

If checkable deposits decrease by $40 billion, and balances in the money market mutual funds increase by $40 billion...

M1 money supply will decline, M2 money supply will remain unchanged

Assuming no other changes, if checkable deposits increased by $40 billion and currency in circulation decreased by $40, then...

M1 money supply will not change

currency held in the vault of the First National Bank is

NOT counted as part of the money supply; money in banks/federal institutions are not counted in the money supply

Who is paper money (currency) in the US issued by?

The Federal Reserve System

expansionary monetary policy is a fed policy where

administered rates may be lowered to encourage bank and nonbank lending

compared to fiscal policy, monetary policy has a much shorter

administrative lag

when the interest on reserve balances is LOWER than the federal funds rate, how will banks respond?

banks will withdraw from their account at the Federal Reserve Bank and lend the funds in the federal funds market

which best describes how IORB serves as a reservation rate

because IORB is a risk-free option, banks should not be willing to lend their funds for less than they can earn on their reserve balances

how does the federal reserve change the money supply

by providing forward guidance about how it intends to conduct monetary policy

money supply is backed

by the governments ability to control the supply of money and therefore keep its value relatively stable

in the US, the M1 money supply includes

coins, paper currency, checkable deposits, and saving deposits

Where does the Federal Deposit Insurance Corporation (FDIC) insure deposits?

commercial banks & thrifts

What does the Board of Governors do?

coordinates policies for the 12 Federal Reserve Banks

if the fed wants to encourage bank lending it will

decrease the IORB rate

which is a monetary policy intended to combat a recession?

decrease the federal funds target range to shift the AD curve rightward

how will raising the ON RRP rate effect the money supply

decrease the money supply

Other things equal, an excessive increase in money supply will

decrease the purchasing power of each dollar

interest rate in which the fed lends to banks

discount rate

the rate banks pay for loans from the Fed

discount rate

which monetary policy tool serves as a ceiling for the federal funds rate?

discount rate

when the fed uses restrictive monetary policy, the prices of government bonds

fall

does the fed's dual mandate give more weight to full employment target or inflation target

full employment b/c very bit of cyclical unemployment represents personal misery for those left unemployed

if the fed increases the IORB rate held at the fed, what will banks do?

hold even more reserves in their account at the fed which reduces the amount it is willing to lend

other things equal, a contractionary monetary policy during a period of demand-pull inflation will

increase interest rates, decrease investment, decrease aggregate demand

The Federal Reserve System is an

independent agency of government

which monetary policy tool implementation tool is the primary tool the Fed uses to steer the federal funds rate into the FOMC's target range?

interest on reserve balances (IORB)

federal funds rate

interest rate that banks charge other banks

the value of money varies

inversely with the price level

what are the advantages of monetary policy over fiscal policy?

isolation from political pressure, the subtlety with which it can be used, and the quickness with which it can be used

What actions does the Federal Reserve System perform?

issues paper currency, lends money to banks and thrifts, and provides financial services to the federal government

which best describes how the FOMC conducts monetary policy during an inflationary period to achieve its price stability objective?

it increases the target range for the federal funds rate

The amount of money reported as M2 is

larger than the amount reported as M1

how does the FOMC conduct monetary policy to increase employment during a recession to achieve maximum employment objective?

lower target range to federal funds rate --> decreases the IORB rate, ON RRP rate, and the discount rate

if you write a check on a bank to purchase a used Honda Civic, you are using money primarily as...

medium of exchange

equilibrium interest rate

money supply = money demand

neutral monetary policy

money supply and interest rates are left as they are

is monetary policy more effective in reducing inflation or combating recession

more effective in controlling inflation than in moving the economy out of a recession

what are the tools the Fed can use to alter the money supply

open market operations, providing forward guidance, or changing any of the 3 administered rates

which is a tool of monetary policy?

overnight reverse repurchase agreement facility (ON RRP)

which monetary policy tool is a supplementary tool that sets a floor for the federal funds rate?

overnight reverse repurchase agreement facility (ON RRP)

what are the Fed's dual mandate goals

price stability and maximum employment

fed can increase aggregate demand by

reducing the 3 administered rates

Placing earnings in a savings account is using money as which function?

store of value

what role do open market operations play in monetary policy?

the Fed uses open market operations to ensure that the level of reserves remains ample

if the inflation rate is 7% and the unemployment rate is 3%...

the Fed will most likely choose a restrictive monetary policy

in the US economy, the money supply is controlled by

the Federal Reserve System

Who are the members of the Board of Governors selected by?

the US president and confirmed by the Senate

what "backs" the value of money in the United States?

the acceptability of it as a medium of exchange

contractionary monetary policy is designed to shift

the aggregate demand curve leftward

what is the effective federal funds rate

the equilibrium interest rate determined in the federal funds market

When the FOMC conducts monetary policy, it sets the target range for

the federal funds rate

the interest rate that banks charge other banks for loans is

the federal funds rate

monetary policy is the responsibility of

the federal reserve system

The more independent the central bank...

the lower the average annual rate of inflation

what happens is the federal reserve buys government securities

the money supply will increase

What is the important reason why members of the Federal Reserve Board of Governors are given 14 year terms?

to insulate members from political pressures that could result in inflation

An $80 price tag is an example of what money function?

unit of account

Stock market price quotations best exemplify what money function?

unit of account

if you are estimating your total expenses for school next semester, you are using money primarily as...

unit of account

What does the Federal Open Market Committee (FOMC) do?

votes on the Fed's monetary policy and directs the purchase or sale of government securities

Jimmy has $2,900 in his checking account, he uses his debit card to withdraw $290 of cash, by what amount did the M1 money supply change?

zero because withdrawing decreased M1 by 290, but he increased M1 by 290 by getting cash


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