Chapter 16 - The Federal Reserve and Monetary Police

Explain the easy money policy.

Easy money policy is the monetary policy that increases the money supply. It makes money cheaper to borrow and encourages people as well as businesses to borrow money for goods and services.

Define monetary policy.

Monetary policy is an attempt by the Federal Reserve and the executive branch to achieve broad economic goals through the regulation of the supply of money.

Explain the difference between prime rate, federal funds rate, and the discount rate.

Prime rate is the rate of interest banks charge on short-term loans to their best customers. Federal funds rate is the interest banks charge each other for loans. Discount rate is the Federal Reserve charges for loans to commercial banks.

Identify and explain the three monetary policy tools (reserve requirement, discount rate, open market operations).

Reserve requirement is the amount of money on hand in the bank. Discount rate is the amount of interest charged on loans to banks that borrow from the Fed. Open market operations involves the buying and selling of government securities.

Identify the parts or components of the Federal Reserve System.

The Federal Reserve System is made up of the Board of Governors, twelve district reserve banks, member banks, and the Federal Open Market Committee.

Identify and explain how the Federal Reserve serves the federal government.

The Federal Reserve serves as banker for the US government by maintaining a checking account for the Treasury Department and processing payments. The Federal Reserve also serves as a financial agent for government agencies by selling, transferring, and redeeming government bonds, bills, and notes while also making interest payments on securities. The Federal Reserve even issues currency through the US Department of Treasury.

Identify and explain how the Federal Reserve serves banks and regulates the banking industry.

The Federal Reserve serves banks by clearing checks with high-speed equipment, monitoring financial activities such as lending, and giving commercial banks loans as a last resort. The Federal Reserve regulates the banking industry by conducting bank examinations to make sure banks are obeying laws and regulations. The Federal Reserve even tracks the fractional reserve system.

Explain the reasoning behind the creation of the Federal Reserve.

The Federal Reserve was created in 1913 to restore confidence in the banking system, regulate and supervise the banking system, and act as a lender of last resort to avert banking panics.

Explain the relationship between the money supply and interest rates.

The higher the interest rate, the more it costs to borrow money and less money will be used. The lower the interest rate, the less it costs to borrow money and more money will be used.

Explain the tight money policy.

Tight money policy is the monetary policy that reduces the money supply. It makes money expensive to borrow and discourages people as well as businesses to borrow money for goods and services. It also decreases inflation.