Macro Exam 4 Review (Lily Watkins - Russell)

How many regularly scheduled FOMC meetings are schedule per year?

8

What is the FOMC's target for the inflation rate?

Average 2% over time

How is the interest on reserve balances rate a reservation rate?

Banks should not be willing to accept a lower rate for their funds.

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

Banks will borrow in the federal funds market and deposit funds at their Federal Reserve Bank.

Using the concept of arbitrage, when the interest on reserve balances rate is lower than the federal funds rate, how will bank likely responds?

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

How does the discount rate act as a ceiling for the federal funds rate?

Banks won't pay more than the discount rate because they can always borrow from the Feds.

Hows arbitrage ensure that the federal funds rate does not fall far below the interest on reserve balances rate?

Because as that process keeps happening the FFR is going to change in the increase of demand or supply of funds and bring it right into line with the IORB

What best describes how interest on reserve balances serves as a reservation rate?

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

The Federal Reserve System consists of which of the following?

Board of Governors and the 12 Federal Reserve Banks

How does the Fed use open market operations to ensure reserves remain ample?

Buy securities if we wanted to make sure the money supply would be ample

If the FOMC thinks the economy is overheating (growing too fast), what kind of policy might it use?

Contractionary / tighter

If the FOMC determines that employment or inflation are too low, what kind of policy might it use?

Expansionary/accommodative

In the U.S. economy, the money supply is controlled by the

Federal Reserve System

To conduct monetary policy, the FOMC sets a target range for which important rate?

Federal funds rate

What is the Fed's primary tool for implementing monetary policy?

IORB

What does it mean to conduct monetary policy

Increasing or decreasing interest rates

What is the Fed's primary tool for steering the federal funds rate into the target range?

Interest on reserve balances

When banks deposit funds at their Federal Reserve Bank, what interest rate do they earn?

Interest on reserve balances rate

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

It increases the target rate range for the federal funds rate.

How is the federal funds rate determined?

It is determined in the federal funds market

How does a lower federal funds rate transmit to achieving the dual mandate?

It will encourage other interest rates to fall, and result in more spending and less saving by households and businesses.

How does a higher federal funds rate transmit to achieving the dual mandate?

It will encourage other interest rates to rise, and result in less spending and more saving by households and businesses

Increase in Recession

Lower interest rates throughout the market shift the AD curve to the right. By doing this we do sacrifice price level.

How can the FOMC adjust policy if it thinks the economy is weakening, with employment falling below its maximum level?

Lower the federal funds rate target range

What best describes how the FOMC conducts monetary policy to increase employment during a recession to achieve its maximum employment objective?

Lower the target range for the federal funds rate and simultaneously decrease the interest on reserve balances rate, overnight reverse repurchase agreement offering rate, and discount rate.

What two main goals has Congress given the Federal Reserve System?

Maximum employment and price stability

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

Overnight reverse repurchase agreement facility

What are the Fed's dual mandate goals?

Price Stability and Maximum Employment

How can the FOMC adjust policy if it thinks the economy is overheating, with inflation rising above its price stability target?

Raise the federal funds rate target range

What is the correct order of events? The FOMC adjusts the federal funds rate, the Fed adjusts the interest on reserves balances rate, and arbitrage moves the target range. The FOMC adjusts the interest on reserve balances rate, the Fed adjusts the target range, and arbitrage moves the federal funds rate into the target range. The FOMC adjusts the target range, the Fed adjusts the federal funds rate, and arbitrage moves the interest on reserve balances into the target range. The FOMC adjusts the target range, the Fed adjusts the interest on reserves balances rate, and arbitrage moves the federal funds rate into the target range.

The FOMC adjusts the target range, the Fed adjusts the interest on reserves balances rate, and arbitrage moves the federal funds rate into the target range.

If the FOMC pursues expansionary policy, how will it adjust the federal funds rate target and the interest on reserves balances rate?

The FOMC will lower the federal funds rate target range, and the Fed will lower the interest on reserves balances rate.

If the FOMC raises the target range, how does arbitrage ensure the policy change is implemented?

The Fed raises the interest on reserves balances rate, and arbitrage ensures the federal funds rate moves up

What function does interest on reserve balances serve besides an opportunity for banks to earn interest?

The Fed uses it to steer the federal funds rate into the FOMC's target range.

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.

When the interest on reserve balances rate is higher than the federal funds rate, how will arbitrage pull the two rates together?

The increase in competition for funds in the federal funds market will pull the federal funds rate higher.

Discount rate

The rate at which Feds borrows from banks

Give an example of banks arbitraging between the federal funds market and interest n reserve balances.

When the federal reserves IORB was set at 2.5 and the FFR was 2 they would borrow money out of the FFR market and invest it into the reserve accounts

Compared to fiscal policy, monetary policy has a much shorter

administative lag

A contractionary monetary policy is designed to shift the

aggregate demand curve leftward

The members of the Federal Reserve Board

are appointed for 14-year terms.

The money supply is backed

by the government's ability to control the supply of money and therefore to keep its value relatively stable.

In the United States, the money supply (M1) includes

coins, paper currency, checkable deposits and savings deposits.

Which of the following is a monetary policy intended to combat a recession?

decrease the federal funds target range to shift the aggregate demand curve rightward

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

discount rate

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

increase interest rates, reduce investment, and reduce aggregate demand

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

interest on reserve banks

The value of money varies

inversely with the price level

The amount of money reported as M2

is larger than the amount reported as M1.

How does the interest rate on reserve balances rate serves as a reservation rate?

it sets the minimum at which banks loan money out

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

medium of exchange

Currency held in the vault of First National Bank is

not counted as part of the money supply

How long is a typical federal funds market loan between banks?

overnight

Which of the following is a tool of monetary policy?

overnight reverse repurchase agreement facility

The discount rate is the rate that banks pay for loans from

the Fed

The interest rate that banks charge other banks for loans

the federal funds rate

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

the federal funds rate

What is not one of the advantages of monetary policy over fiscal policy? isolation from political pressure the subtlety with which it can be used the quickness with which it can be used the lack of any timing lags

the lack of any timing lags

Research for industrially advanced countries indicates that

the more independent the central bank, the lower the average annual rate of inflation.

The Federal Open Market Committee (FOMC) is made up of

the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.

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

unit of account