Econ Final

The organization directly responsible for monetary policy in the United States is the

Federal Reserve

In the cause-effect chain, an expansionary monetary policy increases the money supply, decreases the interest rate, increases investment spending, and increases aggregate demand.

True

The Federal Reserve announces its changes in monetary policy by changing its targets for the federal funds rate.

True

The economy component of M1 includes both coins and paper money

True

When commercial banks borrow from the Federal Reserve Banks at the discount rate, they increase their excess reserves and their money-creating potential.

True

The Federal Reserve Banks perform essentially the same functions for

commercial banks and thrifts as those institutions do for the public

The most important function of the Federal Reserve is

controlling the money supply

To keep the purchasing power of money fairly stable, the Federal Reserve

controls the money supply

M1 is

currency and Checkable deposits

High rates of inflation in an economy will

decrease the use of money as a medium of exchange

Velocity

how many times a dollar is spent in a year

The 12 Federal Reserve Banks are

privately owned but publicly controlled

The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily responsible for

setting the Fed's monetary policy and directing the buying and selling of government securities

The members of the Board of Governors of the Federal Reserve System are appointed by

the US president and confirmed by the state

If the reserve ratio is lowered, some required reserved are turned into excess reserves.

True

The Federal Reserve Banks buy $15 in government securities from the public in the open market, the effect will be to increase the excess reserves of commercial banks by $15.

False

The goal of monetary policy is to lower interest rates.

False

The least effective and least used tool of monetary policy is the open-market operations, in which government securities are bought and sold.

False

The money supply designated M1 is the sum of currency and savings deposits.

False

The Board of Governors and 12 Federal Reserve Banks as a system serve as

A central bank

The prime interest rate is the rate that banks charge other banks for overnight loans of excess reserves at Federal Reserve banks

False

In the chain of cause and effect between changes in the excess reserves of commercial banks and the resulting changes in output and employment in the economy?

A decrease in the money supply will increase the rate of interest

if a coin is token money, its face value is less then its intrinsic value.

False

The economy is experiencing high unemployment and a low rate of economic growth and the Fed decides to pursue an easy money policy. Which set of actions by the Fed would be most consistent with this policy?

Buying government securities and lowering the reserve ratio

If the price level increases 20%, the purchasing power of money decreases

16.67%

Assume that there is a 20% reserve ratio and that the Federal Reserve buys $100 million worth of government securities. If the securities are purchased from the public, this action has the potential to increase bank lending by a maximum of

$400 million, but by $500 million if the securities are purchased directly from commercial banks

Value of Money

1. Acceptability- Confidence and trust that the dollar will buy what you want 2.Legal Tender- Government law, pay bills, cant sue 3. Relative scarcity- supply and demand

Functions of the Federal Reserve

1. Hold members "reserves" 2. supply. the economy with currency (Christmas) 3. Clearing house for checks 4. Agent for government collect and give out money for government 5. Police member banks 6. Publish statistics and reports on financial matters. 7.Regulate the supply of money

Functions of money

1. Medium of exchange 2. Measure of value 3. Store of value 4. Standard of Deffered payment

Money defined as

Anything generally accepted as a means of paying for goods or services.

Monetary policy goals

Assist economy in achieving full employment, non inflation, and raise GDP

Which of the following would be excluded from M1 and other measures of the money supply? A. coins held by the public B. currency held by banks C. Federal Reserve Notes held by the public D. checkable deposits of individuals at commercial banks

B. currency held by banks

Lowering the reserve ratio:

Changes required reserves to excess reserves

Checkable deposits are money because they are A. legal tender B. fiat money C. token money D. a medium of exchange

D. a medium of exchange

A change in the reserve ratio will affect the multiple by which the banking system can create money, but it will not affect the actual or excess reserves of member banks.

False

A restrictive monetary policy is designed to correct a problem of high unemployment and sluggish economic growth.

False

It is generally agreed that fiscal policy is more effective than monetary policy in controlling the business cycle because fiscal policy is more flexible.

False

Monetary policy is subject to more political pressure than fiscal policy.

False

Real estate is an example of a liquid asset.

False

Commercial bank borrowing from the Federal Reserve:

Increases the excess reserves of commercial banks and their ability to offer credit

Are credit cards considered money?

No, because they provide a short term loan to cardholders from a fincancial institution that issued the card.

Which is the most important control used by the Federal Reserve to regulate the money supply?

Open-market operations

The economy is experiencing inflation and the Federal Reserve decides to pursue a tight money policy. Which set of actions by the Fed would be most consistent with this policy?

Selling government securities and raising the reserve ratio

Which best describes the banking of money in the United States?

The belief of holders of money that it can be exchanged for desirable goods and services.

Target Dilemma

The fed can control the money supply (inflation) or the interest rates, but not both.

Discount Rate

The interest rate that the Fed. will charge on short term loans to banks

Assuming the Federal Reserve Banks sell $20 million in government securities to commercial banks and the reserve ratio is 20%, then the effect will be:

To reduce the potential money supply by $100 million

An increase in the required reserve ratio tends to reduce the profits of banks.

True

Currency and checkable deposits are money because they are acceptable to sellers in exchange for goods and services.

True

If money is to have a fairly stable value, its supply must be limited relative to the demand for it.

True

If the monetary authority wished to follow a restrictive monetary policy, it would sell government securities in the open market.

True

Foreign exchange market intervention

work with other industrial countries to stabilize international trade.