Macro Final exam (CH 14,15,16)
what is the federal reserve?
banking system 1.)12 federal reserve banks 2.)serve as the central bank 3.)quasi-public banks 4.)bankers bank
how is money used as a medium of exchange?
buy/sell goods
what is vault cash?
cash held by the bank
what is the reserve ratio?
changes the money multiplier
what is an equilibrium interest rate
changes with shifts in money supply and money demand
A decrease in the reserve ratio increases the:
amount of excess reserves in the banking system.
the federal funds market experiences ____
conflicting goals with a main goal to earn a profit
how is money used as a unit of account?
goods valued in dollars
what is the most important tool of monetary policy?
open market operations
the discount rate was a ____ tool
passive (interest on reserves)
what affects the purchasing power of money?
prices
what does hyperinflation do to money?
renders money unacceptable
If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government:
surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
if real GDP= potential GDP and inflation = 2% then,
targeted federal funds rate is 4%
who controls the money?
the Fed (designed to control inflation)
The federal funds rate target is the most frequently used monetary policy tool.
false
what is the formula for the money multiplier
(1/requied reserve ratio)= (1/R)
describe Da
(asset demand) 1.)money as a store of value 2.)varies inversely with interest rate
how do you calculate required reserves
(checkable deposits)x(reserve ratio)
describe Dt
(transactions demand) -determined by nominal GDP -independent of the interest rate
what are the functions of a commercial bank?
1.) accepting deposits 2.)marking loans
how does the fed earn a profit
1.) making loans to earn interest 2.)buying securities to earn interest
describe the dynamic of a single commercial bank
1.) the fed can establish and vary the reserve ratio within limits set by congress 2.)required reserves help the fed control lending abilities of commercial banks 3.)excess reserves
what are the assumptions of the banking system?
1.)20% required reserves 2.)all banks "loaned up" 3.)banks lend all of their excess reserves 4.)a $100 bill is found and deposited 5.)multiple deposits can be created
how is the demand for money quantified?
1.)Dt 2.)Da 3.)Dm
what is M2?
1.)M1 plus near-monies 2.)savings deposits including money market deposit accounts (MMDA) 3.)small denominated time deposits 4.)money market mutual funds (MMMF)
what makes up the federal reserve balance sheet?
1.)assets 2.)liabilities
what is a balance sheet?
1.)assets=liabilities + net worth 2.)both sides balance
what are the specifics of Fractional Reserve system characteristics?
1.)banks create money through lending 2.)banks are subject to "panics"
what are open market operations?
1.)buying and selling of government securities (or bonds) 2.)commercial banks and the general public 3.)used to influence the money supply
what affects the real GDP and the price level?
1.)cause and effect chain 2.)expansionary monetary policy 3.)restrictive monetary policy
what are institutions offering checkable deposits
1.)commercial banks 2.)savings and loan association 3.)mutual savings banks 4.)credit unions
what are necessary transactions
1.)create a bank 2.)accept deposits 3.)lend excess reserves
what is M1?
1.)currency 2.)checkable deposits
what are some of the main goals of the fed?
1.)earn a profit 2.)maintain liquidity 3.)create banking alternative
what is expansionary monetary policy?
1.)economy faces a recession 2.)lower target for federal funds rate 3.)fed buys securities 4.)expanded money supply 5.)downward pressure on other interest rates
federal reserve independence
1.)established by congress as an independent agency 2.)protects the fed from to take the actions to increase interest rates in order to stem inflation as needed
what are the types of monetary policy?
1.)expansionary 2.)restrictive
describe the relationships between the fed and commercial banks
1.)fed buys bond from comm banks 2.)fed sells bond t comm banks 3.)fed buys $1,000 bond from comm bank 4.)fed buys $1,000 bond from the public
expansionary monetary policy problem: unemployment/recession
1.)fed buys bond, lowers reserve ratio, lowers the discount rate, or increases reserve auctions 2.)excess reserves increase 3.)federal funds rate falls 4.)money supply rises 5.)interest rate falls 6.)investment spending increases 7.)aggregate demand increases 8.)Real GDP rises
If bond prices decrease, then the:
Interest rate increases
Restrictive monetary policy Problem: inflation
1.)fed sells bonds, increases reserve ratio, increases discount rate or decreases reserve auctions 2.)excess reserves decrease 3.)federal funds rate rises 4.)money supply falls 5.)interest rate rises 6.)investment spending decreases 7.)aggregate demand decreases 8.)inflation declines
what are the aspects of the Fractional Reserve system?
1.)goldsmiths 2.)characteristics 3.)balance sheets 4.)necessary transactions
what are some worries about ZIRP, QE and Twist?
1.)government spending crowded out private spending 2.)largest budget deficits by the federal government would lead to huge interest costs 3.)low interest rates punish savers
what "backs" the money supply
1.)guaranteed by government ability to keep value stable 2.)money as debt 3.)why is money valuable 4.)acceptability 5.)legal tender 6.)relative scarcity
describe the recent US monetary policy
1.)highly active in recent decades 2.)responded with quick and innovative actions during the recent financial crisis and the severe recession 3.)critics contend the fed contributed to the crisis by keeping the federal funds rate too low for too long
what is a term auction facility
1.)introduced Dec 2007 2.)banks bid for the right to borrow reserves
interest rates and bond prices
1.)inversely related 2.)bond pays fixed annual interest payment 3.)lower bond price will raise the interest rate
what are federal reserve functions
1.)issue currency 2.)set reserve requirements 3.)lend money to banks 4.)collect checks 5.)act as a fiscal agent for US Government 6.)supervise banks 7.)control money supply
what is reversibility?
1.)making loans creates money 2.)loan repayment destroys money
what is the cause and effect chain?
1.)market for money 2.)investment and interest rate 3.)investment and aggregate demand 4.)real GDP and prices
what are the functions of money?
1.)medium of exchange 2.)unit of account 3.) store of value 4.)money is liquid
describe the banking system
1.)multiple-deposit expansion
what are the tools of monetary policy?
1.)open market operations 2.)**reserve ratio 3.)**discount rate 4.)**term auction facility 5.)****open market operations
what type of alternative is the fed trying to create?
1.)overnight bank loans 2.)federal funds rate
what is restrictive monetary policy?
1.)periods of rising inflation 2.)increases federal funds rate 3.)increases money supply 4.)increases other interest rates
what is an interest rate?
1.)price paid for the use of money 2.)determined by the money supply and money demand 3.)multiple types of IRs
what is the federal funds rate?
1.)rate charged by banks on overnight loans 2.)targeted by federal reserve 3.)FOMC conducts open market operations to achieve the target 4.)demand curve for fed funds 5.)supply curve for fed funds
what does depositing reserves in a federal reserve bank require?
1.)reserves 2.)reserve ratio
what is a liability?
1.)reserves of commercial banks 2.)treasury deposits 3.)federal reserve notes outstanding
what is the taylor rule?
1.)rule of thumb for tracking actual money policy
what is an asset?
1.)securities 2.)loans to commercial banks
describe the fiscal policy after the great recession
1.)slow recovery especially in terms of unemployment 2.)zero interest rate policy 3.)zero lower bound problem 4.)quantitative easing 5.)forward commitment 6.)operation twist
what are the advantages over fiscal policy?
1.)speed and flexibility 2.)isolation from political pressure 3)monetary policy is more subtle than fiscal policy
what are goldsmiths
1.)stored gold and gave a receipt 2.)receipts used a money by public 3.)made loans by issuing receipts
what is the discount rate?
1.)the Fed as lender of last resort 2.)short term loans
when was the reserve ratio last changed?
1992
what is the Fed's target inflation rate?
2%
Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should:
4-6
Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?
A tax increase and an increase in the money supply.
An increase in the money supply is likely to reduce:
Interest rates
A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:
Asset demand for money
If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:
Decrease the excess reserves of member banks and thus decrease the money supply
A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:
Ease monetary policy
Monetary policy is expected to have its greatest impact on:
Ig.
An increase in nominal GDP will:
Increase the transactions demand and the total demand for money
A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:
Reduce inflationary pressures in the economy
A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to:
Stimulate the economy
Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:
The money supply by potentially $200 million
A consumer holds money to meet spending needs. This would be an example of the:
Transactions demand for money
Lowering the discount rate has the effect of:
Turning required into excess reserves
Lowering the reserve ratio:
Turns required reserves into excess reserves
Federal Reserve Notes in circulation are:
a liability as viewed by the Federal Reserve Banks.
how do you calculate excess reserves?
actual reserves-required reserves
Compared to fiscal policy, monetary policy has a much shorter:
administrative lag
Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.
decrease; increase
The demand for federal funds is
downsloping because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates will encourage borrowing.
A restrictive monetary policy may be frustrated if the investment-demand curve shifts to the left.
false
An expansionary monetary policy is one that reduces the supply of money.
false
The asset demand for money varies inversely with the nominal GDP.
false
how is money used as a store of value?
hold some wealth in money form
It is costly to hold money because:
in doing so, one sacrifices interest income.
Interest paid on reserves held at the Fed:
incentivizes financial institutions to hold more reserves and reduce risky lending.
small losses can drive banks into
insolvency
what stabilizes money's purchasing power
intelligent management of the money supply-monetary policy
know large diagram on last page of notes
know large diagram on last page of notes
what are the complications with the current monetary policy?
lags -recognition and operational lag -cyclical asymmetry -liquidity trap
An increase in the money supply will:
lower interest rates and increase the equilibrium GDP.
the higher the reserve ratio the lower the
money multiplier
when the fed sells securities, what happens to commercial bank reserves
they are reduced
what is Dm
total money demand
A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.
true
what is leverage?
use of borrowed money to magnify profits and losses
target federal funds rate does what?
varies as inflation and real GDP vary
The asset demand for money:
varies inversely with the rate of interest.