4.3 Econ
DON'T KNOW THIS ONE when an economy is operating below the fully employment level of output, an appropriate monetary policy would be to increase
open market purchases of gov bonds
to decrease the money supply, the Fed should ________ bonds
sell because then the gov is taking money from the economic system (banks and individuals)
discount rate
the interest rate that the Fed charges commercial banks
The Fed decreases the money supply
to slow down the economy interest rates increase, investment decreases, and aggregate demand, and AD decreases
3 shifters of money supply
1) setting reserve requirements (ratios) 2) lending money to banks and thrifts (discount rate) 3) open market operations (buying and selling bonds)
When the money supply increases
1. the Money Supply graph shifts right, and Interest rates decrease 2. the Quantity of Investment increases, and interest rates decrease 3. The aggregate demand increases
If an individual deposits money, there is creation of money. Money multiplier
1/reserve requirement
which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation?
A decrease in reserves in the banking system, because a decrease in reserves means that the bank bought bonds from the government, meaning the government sold bonds and took money out of the economic system, meaning inflation was reduced
If there is inflation, what should the Fed do to the reserve requirement?
INCREASE THE RESERVE RATIO 1. Banks hold more money, have less excess reserves 2. Money supply decreases, because banks create less money 3. Aggregate Demand decreases because there is a decrease in investment 4. Decrease in AD means decrease in inflation
To increase the money supply, the Fed should _________ bonds.
buy, because the gov is then putting money into the economic system by paying banks or people
To increase the money supply, the FED should _________the discount rate
decrease (easy money policy)
the federal funds rate
the interest rate at which banks make overnight loans to one another
Open market operations
when the Fed buys or sells government bonds (aka securities) The MOST IMPORTANT and WIDELY USED monetary policy
If there is a recession, what should the FED do to the reserve requirement?
Decrease the reserve ratio
How does the Fed influence the federal funds rate?
by buying and selling bonds. the Fed can incrase the federal funds rate by selling bonds, because when it sells bonds, it decreases the money supply, which increases the interest rate, and the federal funds rate is a type of interest rate.
To decrease the money supply, the FED should ________the discount rate
increase (tight money policy)