The Federal Reserve and Monetary Policy
Monetary policy that increases the money supply.
Easy money policy is _____.
Required reserve ratio.
Ratio of reserves to deposits required of banks by the Federal Reserve:
Board of governors.
The seven-member board that oversees the Federal Reserve System:
Outside lag.
The time it takes for monetary policy to have an effect:
Federal reserve districts.
The twelve banking districts created by the Federal Reserve Act:
Open market operations.
What is the policy used most by the Fed to change the money supply?
As interest rates decrease, demand for money increases.
What is the relationship between interest rates and demand for money?
The portion of a deposit that a bank must keep on hand.
What is the required reserve ratio (RRR)?
It makes key decisions about interest rates and the growth of the United States money supply.
What is the role of the Federal Open Market Committee (FOMC)?
Tight monetary policy
What monetary policy should be implemented to correct an inflationary economy?
To provide consumers with access to funds for business expansion.
What was one reason the U.S. government started a Federal Reserve System?
United States Mint
Where are coins manufactured?
Decreasing the discount rate.
Which monetary policy tool is considered an expansionary tool?
Reduce the money supply.
Which of the following actions would the Fed take to fight inflation?
Members of the Board of Governors refuse to lower the discount rate until several months after a recession has begun.
Which of the following is an example of inside lag in monetary policy?
Selling government securities.
Which of the following is one way the Federal Reserve Bank serves the government?
The initial deposit is $6,500 and the required reserve ratio is 20 percent.
Which of the following would create the most money?
The economy is expanding quickly and inflation is a concern.
Which of these situations is most likely to cause the Fed to introduce a tight money supply?
The U.S. President
Who appoints the members of the Board of Governors of the Federal Reserve?
The district Federal Reserve Banks
Who issues U.S. paper currency?
Member banks
Who owns the Federal Reserve System?
To be sure it can meet its customers' demands.
Why does a bank sometimes hold excess reserves?
They can earn interest on the cash if it is invested.
Why does a high interest rate discourage people from holding their money in cash?
It can be disruptive to the whole banking system.
Why does the Fed rarely increase reserve requirements?
The system is owned by the banks.
Why does the Federal Reserve System have a high degree of political independence?
To lessen the effect of natural business cycles.
Why does the Federal Reserve alter monetary policy?
Citizens feared that a central bank placed too much power in the hands of the federal government.
Why were many U.S. citizens against the Second Bank of the United States, which was an attempt by Congress to restore order in the monetary system in 1816?
Excess reserves.
In banking, reserves of cash more than the required amounts:
Discount rate.
Rate the Federal Reserve charges for loans to commercial banks:
Check clearing.
Process by which banks record whose account gives up money and whose account receives money when a customer writes a check:
Money creation.
Process by which money enters into circulation.
Monetary policy.
Actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy:
Money multiplier formula.
Amount of new money that will be created with each demand deposit; 1 ÷ RRR:
It decreases.
As commercial banks keep more excess reserves, what happens to money creation?
Bonds and savings accounts become less attractive for investment.
As interest rates rise, _____.
Authorized to force banks to sell off investments that they consider excessively risky.
Bank examiners are _____.
Monetarism.
Belief that the money supply is the most important factor in macroeconomic performance:
Bank holding company.
Company that owns more than one bank:
Inside lag.
Delay in implementing monetary policy:
Committee.
Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply.
Bank presidents from Federal Reserve Districts.
Five of the 12 members of the Federal Open Market Committee (FOMC) must be _____.
By reducing the discount rate.
How could the Federal Reserve encourage banks to lend out more of their reserves?
The sale decreases the money supply.
How does a bond sale by the Fed affect the money supply?
Two days
How long does it take for a check to clear?
9
How many directors are on the boards for each of the 12 Federal Reserve banks?
6 months
How quickly can an increase in government spending increase the gross domestic product?
Individual governors of the Federal Reserve Banks disagreed over policy and were unable to stop the depression.
How well did the Federal Reserve Banks perform during the Great Depression?
A decrease in the money supply.
If the Fed were to impose a slight increase in the required reserves ratio, there would be _____.
25 percent
If the money multiplier is 4, what is the required reserve ratio (RRR)?
$4,000
If the required reserve ratio is 20 percent and a customer deposited $5,000 in the bank, how much is available to the bank for lending?
The Federal Reserve System was given more centralized power.
In 1935, what changes were made to the Federal Reserve System?
Federal funds rate.
Interest rate banks charge each other for loans:
Prime rate.
Rate of interest that banks charge on short-term loans to their best customers:
There are more political complications with determining and implementing fiscal policy.
Monetary policy administered by the Fed is the principal method of softening the effects of the business cycle because _____.
Easy money policy.
Monetary policy that increases the money supply:
Tight money policy.
Monetary policy that reduces the money supply:
Reacting to current trends.
Monetary policy-makers can help smooth out the fluctuations of the business cycle by _____.
Federal advisory council.
Research arm of the Federal Reserve.
Board of Governors
The Federal Reserve System is overseen by the _____.
Open market operations.
The buying and selling of government securities to alter the supply of money:
Determines the amount of new money that will be created with each demand deposit.
The money multiplier formula _____.
Net worth.
Total assets minus total liabilities:
Sellers provide full and accurate information about loan terms.
Truth-in-lending laws require that _____.
An increase in the money supply.
What change in monetary policy could eventually cause overborrowing and overinvestment?
It will lend money to a bank in a financial emergency.
What does "lender of last resort" mean with respect to the Federal Reserve?
One that keeps only a small part of customers' deposits on hand.
What does a "fractional reserve banking system" mean?
Changes in government spending and taxation.
What does fiscal policy include?
It alters the supply of money.
What does monetary policy do?
They slow it down.
What effect do low interest rates have on business investment?
Do nothing and let the economy fix itself.
What is likely to be the best approach to a recession that is expected to turn into an expansion in a short time?
It processes payments, such as Social Security checks.
What is one service the Fed performs for the Treasury Department?
For regulating the nation's money supply.
What is the Federal Reserve best known for?
The price of the interest rate.
What is the cost of money?
To make sure banks are obeying laws and regulations.
What is the function of a bank examiner?
Each district is made up of more than one state. Federal Reserve Districts include a mixture of agricultural, manufacturing, and service industries as well as rural and urban areas.
What is the makeup of the Federal Reserve Districts?
Open market operations
What is the most-used instrument for controlling week-to-week changes in the money supply?