Econ 202- Macroeconomics - Monetary Policy

Monetary Policy affects:

- The price of goods, services, and resources - interest rate paid on savings - interest rate charged on loans

Banks can expand reserves, and make more loans by:

- attracting deposits and encouraging saving. - borrowing from the Federal Reserve

The money multiplier equals:

1/reserve requirement

______________ reserves are equal to total reserves minus required reserves.

Excess

Changing the money supply can affect:

Interest rates, thereby changing investment spending

When you believe the Federal Reserve will soon ______________ bonds, you should buy them as soon as you can.

buy

The Fed uses open market operations to target the:

federal funds rate

The interest rate that banks pay in the formal market for overnight loans of federal reserves is called the:

federal funds rate

Banks can create money by making use of:

fractional reserve banking

When the Federal Reserve wants to buy or sell U.S. Treasury bonds, the Fed makes these transactions with the:

general public

If the Federal Reserve decreases the discount rate there will be ___________ borrowing from the Federal Reserve and banks will __________ lending. This will ___________ the money supply and ___________ interest rates.

more; increase; increase; decrease

The money ____________ is the amount by which a $1 change in reserves will change the money supply.

multiplier

When excess reserves are lent, additional excess reserves are created which are then used to create additional loans, further increasing the money supply through the money ___________ process.

multiplier

When conducting monetary policy, the Fed most often uses:

open market operations

The Federal funds market is the market for borrowing and lending ___________ between banks.

reserves

A "bank _____________" occurs when depositors rush, in mass, to withdraw their funds from a bank.

run

When you believe the Federal Reserve will soon ______ bonds, you should sell them as soon as you can.

sell

When several banks experience bank runs simultaneously, what occurs is a:

"bank panic"

U.S. Treasury bills are:

- Issued for less than one year - Payable only at the end of the bill's maturity date.

During recessions, the Federal Reserve often lowers the discount rate for two reasons:

- It increases consumer and business spending, increasing the demand for goods and services. - they want to ensure that the financial sector will not collapse.

Which three values are all related, so that when one changes, so do the others?

- The dollar value of reserves held by banks, the reserve requirement, and the money supply

The money multiplier will equal 1/rr so long as:

- banks loan out all of their excess reserves. - people can't hold any loaned money as cash.

The federal funds rate is one of the "key" interest rates in the economy because:

- by changing the federal funds rate the Fed can change every other interest rate in an economy. - It represents the interest rate for the least-risky loans in the market

The actions taken by a country's central bank to reduce the money supply and increase the interest rate is called

- contractionary monetary policy - tight money

Monetary policy affects interest rates which in turn, affect:

- employment - inflation - investment - economic growth

Which of the following will cause investment to rise?

- higher expected returns - improved infrastructure

Which of the following will cause investment to fall?

- lower expected returns - higher interest rates -

Organizational safeguards put in place to prevent one government agency from creating money for another government office to spend include:

- the establishment of the Federal Reserve as independent from the federal government - the requirement that the Federal Reserve buy bonds from the institution and people that have already bought bonds.

The current equilibrium interest rate in the money market is _________ %. At this interest rate, there will be $________ billion of investment spending in the economy.

12; 30

Suppose the reserve requirement in the United States is 20% Suppose the Federal Reserve wants to increase the money supply by $100 billion. The Federal Reserve should decrease reserve requirements by $____________ billion.

20 (with a money multiplier of 5, 5 x 20 billion = 100 billion)

Suppose the reserve requirement in the United States is 20% The money multiplier is_________

5?

_____________ demand describes the overall, or total, demand for all final goods and services produced in an economy.

Aggregate

Which of the following does the Fed carefully monitor?

Bank reserves

____________ reserves, the amount the bank can lend out to earn interest, equal ___________ reserves minus _____________ reserves.

Excess; total;

The discount rate is set by the _______________.

Fed

A formal market for overnight loans of federal reserves is the:

Federal Funds Market

One of the key interest rates in the economy is called the:

Federal Funds Rate

The Federal Reserve Board set a target for the ___________ to influence interest rates and to either encourage or discourage additional economic activity.

Federal Funds Rate

The interest rate that banks pay one another for borrowing reserves, or federal funds, overnight so they can meet the reserve requirements set by the Federal Reserve is the:

Federal Funds Rate

Monetary policy refers to the action of the _________________ to influence the supply of money and credit in the U.S. economy.

Federal Reserve

During times of _____________, a decrease in interest rates will stimulate consumption and investment and will encourage firms to hire more workers.

High unemployment

The money multiplier is the amount by which a $1 change:

In reserves will change the money supply

For both households and firms, a(n) _______________ (increase/decrease) in interest rates will result in fewer purchases of new goods and services.

Increase

The table below shows reserve requirements for 5 different countries. Suppose that in each country, there is an increase in reserves of $5,000. When the reserve requirement decreases, for a given increase in reserves, the changes in the money supply ____________.

Increases

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. The action would ____________ Interest rates, which ____________ investment

Increases; Decreases

The payment made to agents that lend or save money, expressed as an annualized percentage of the monetary amount lent or saved is called the ____________ rate.

Interest

A decrease in the supply money will cause the:

Interest rate to rise and the quantity of investment demand to fall.

The interest rate:

Is the price of money

_____________ policy primarily affects the economy by either encouraging or discouraging investment in new capital.

Monetary

The ___________ market is a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances.

Money

For every dollar of bonds the Fed buys or sells, the money supply will increase, or decrease, by an amount equal to the:

Money Multiplier

The _____________ loans a bank makes, the more revenue it can generate.

More

________________ reserves are the fraction, or portion, of check-able deposits that a bank must keep on hand.

Required

The fraction of check-able deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve is called that:

Reserve Requirement

If consumers increase the amount of spending, aggregate demand shifts to the________________.

Right

Suppose the Federal Reserve were to decrease the money supply by $50 billion. This will result in a _____________ of money because the demand of money _____________ the supply of money. The new equilibrium interest rate in the money market is _____________%. At this interest rate, there will be $___________ billion of investment spending in the economy.

Shortage; exceeds; 16; 20

The Fed is another name for:

The Federal Reserve Bank

Bank panics have occurred several times in the United States, although not since the Great Depression.

True

A money market is

a market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances.

When economists talk about "interest rates" or even "the interest rate" they mean:

all interest rates since interest rates all tend to move in the same direction.

The demand for reserves slopes downward because:

at high interest rates, the opportunity cost of borrowing funds rises so bank will be less willing to borrow reserves.

The federal funds rate is the interest rate that banks pay when borrowing reserves from other _____________.

banks

A ___________ is a financial instrument that obligates a borrower to repay money, with interest, to a lender (which may be a government, municipality or corporation.

bond

The Federal funds rate is determined by the supply and demand for ____________ reserves.

borrowed

When the Fed ________ bonds, it creates new money and additional reserves, which expands the money supply and ___________ interest rates.

buys; decreases

A reduction in the money supply, designed to slow economic activity, is called _______________ monetary policy

contractionary

If consumers __________ the amount of spending, aggregate demand shifts to the left.

decrease

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. The Federal Reserve would need to ____________ the money __________

decrease; supply

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. This in turn causes aggregate __________ to ____________

demand; ????

The reserve requirement is the minimum percentage of _____________ that banks must keep on hand as reserves.

deposits

The Federal Reserve sets reserve requirements for banks for:

ensure that banks don't lend out too much money.

Suppose initially the federal funds rate is at the announced Fed target. There is a $20 billion increase in demand for reserves. The quantity of reserves demanded _____________ the quantity supplied. Banks needing reserves will bid __________ the price of these reserves. The federal funds rate would now be ___________ the target rate. To maintain the announced target, the Federal Reserve would need to take action: It would change the quantity of reserves supplied to match changes in demand. Only then could it keep the price of these reserves- the federal funds rate- from changing. In this case, the Fed would ____________ the quantity of federal funds supplied.

exceeds; up; above; increase

Loans created from ___________ reserves expand the money supply by creating excess reserves in the banking system.

excess

The federal funds rate is determined by the supply and demand for __________ reserves.

excess

___________ reserves are equal to total reserves minus required reserves.

excess

The actions taken by a country's central bank to expand the money supply and lower interest rates is called:

expansionary monetary policy

Suppose the economy is "overheating" because of a high inflation rate. Indicate the changes that the economy would go through, if the Federal Reserve decides to take action. As a result, the price level would ___________ but this could cause unemployment to ____________

fall; increase

For decades the reserve requirement has rarely been used as a tool of monetary policy because:

frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets.

Since 2009, the average interest rate on savings accounts:

has decreased

The supply curve for federal funds is:

horizontal

If consumers __________ the amount of spending, aggregate demand shifts to the right

increase

When the Fed _____________ the federal funds rate target, the money supply decreases and interest rates rise.

increases

When the Fed's Open Market Committee decides on a target for the federal funds rate:

it commits to buy and sell bonds through open market operations to maintain the target.

If the Federal Reserve increases the discount rate there will be ______ borrowing from the Federal Reserve and banks will ____________ lending. This will ___________ the money supply and __________ interest rates.

less; decreases; decreases; increases

People unexpectedly deposit more funds to their bank accounts, thereby increasing the level of reserves held by banks. With more reserves on hand, banks will borrow ___________. In the federal funds market. Therefore, the demand for funds in the federal funds market ___________ and the demand curve for federal funds shifts __________. To maintain the target interest rate of 5%, the Federal Reserve needs to ____________ the quantity of reserves supplied by an equivalent amount. To accomplish this, the Federal Reserve conducts open market operations, ____________ bonds.

less; decreases; left; decrease; selling

At ____________ interest rates, the opportunity cost of borrowing funds falls, so banks will be more willing to borrow reserves.

low

The reserve requirement is the ____________ (maximum/minimum) percentage of deposits that banks must keep on hand as reserves.

minimum

A market in which demand for and supply of money determine an interest rate, or opportunity cost of holding money balances is called a ____________ market.

money

Confident of future economic conditions, banks lend more funds to their customers, keeping smaller fractions of their deposits as reserves. With lesser reserves on hand, banks will borrow __________. In the federal funds market. Therefore, the demand for funds in the federal funds market ___________ and the demand curve for federal funds shift __________. To maintain the target interest rate of 5%, the Federal Reserve needs to ___________ the quantity of reserves supplied by an equivalent amount. To accomplish this, the Federal Reserve conducts open market operations, ___________ bonds.

more; increases; right; decreases; buying;

The discount rate is the interest rate that banks:

pay when they borrow money directly from the Fed.

The ______________ rate is the lowest commercially available interest rate.

prime

The interest rate banks charge their best costumers is the called "_______________ rate."

prime

On any given day, while some banks come up short on their ____________ holdings, other banks have more than they need.

reserve

Suppose the Federal Reserve has just raised the federal funds rate. Lending in the federal funds market may now provide a greater return to the bank, relative to holding bonds in its portfolio. As a result, banks may choose to _________ bonds so they can have ___________ reserves to lend. As the __________ bonds ___________ the price of the bond __________. This causes the interest rate earned on the bond to __________. Therefore, the change in bond prices push __________ the yield, or interest rate, the bond pays. So, an increase in the federal funds rate will ___________ interest rates on other short-term assets.

sell; more; supply for; increases; falls; rise; up; increase

The ____________ (one word) is the difference between the interest rate a bank earns on a loan and the interest rate it pays.

spread

The Federal Reserve can influence real GDP by changing the money ___________, which will influence gross ______________

supply; investment

Suppose the Federal Reserve were to increase the money supply by $50 billion. This will result in a _____________ of money because the demand of money _____________ the supply of money. The new equilibrium interest rate in the money market is _____________%. At this interest rate, there will be $___________ billion of investment spending in the economy.

surplus; is less than; 8; 40

Graphically, the federal funds market has the federal funds rate on the ___________ axis and the quantity of reserves on the ____________ axis.

y; x