Banking & The Fed Test Review

If the Fed increases the money supply, it will do what to interest rates?

interest Rates will decrease (lowers them)

If the Fed decreases the money supply, it will do what to interest rates

interest rates will increase (raises them)

How does the Fed create an easy monetary policy?

lowering the reserve requirement and/or buys securities and/or lower the discount rate

What is fiat money?

money that has no tangible backing but is declared by the government and accepted by citizens to have worth

What is commodity money?

objects that have value in themselves as well as their value as a mean of exchange

What decisions does the FOMC make about money?

oversees the open market operations. Level of interest rates and growth of the money supply

What is going on in the economy for the Fed to implement an easy monetary policy?

poor Economic Growth, Declining GDP-Gross Domestic Policy

How does the Fed create the tight monetary policy?

raises the reserve requirement and/or sells securities and/or raises the discount rate

What is representative money?

representative money is paper money that is backed by something tangible like gold or silver

What is a tight monetary policy?

the Fed decreases the money supply by raising interest rates which discourages people from borrowing as much money

What are open market tran

the buying and selling of government securities to change the supply of money

What is a fractional reserve banking system?

a system that keeps only a small part of a deposit on hand and lends out the rest

What is monetary policy?

actions the Federal Reserve takes to influence the economy

What makes up the money supply?

all the money available in an economy. M1 & M2

If the Fed wants to increase the money supply, will they use a tight or easy monetary policy?

Easy Monetary Policy

If the Fed wants to increase the amount of money lent by banks (increase the money supply), what can the Fed do? Open Market Operations:

Fed buys bonds (securities)

What are three tools the Fed uses to change the money supply?

Fractional Reserve Requirement, Open Market Transactions, Discount Rate

What is the most common tool the Fed uses to change the money supply?

Open Market Operations (Transactions), (Buying and Selling Bonds)

What is going on in the economy for the Fed to implement a tight monetary policy?

Prices are rising. Inflation

What tool is hardly used by the Fed? Why

Reserve Requirement. It is disruptive to the banking system

If the Fed wants to increase the amount of money lent by banks (increase the money supply), what can the Fed do? Reserve Requirements:

The Fed decreases the Reserve Requirement

If the Fed wants to increase the amount of money lent by banks (increase the money supply), what can the Fed do? Discount Rate:

The Fed decreases the discount rate

What is an easy monetary policy?

The Fed increases the money supply by lowering interest rates, thus encouraging investment spending

If the fed wants to decrease the amount of money lent by banks (decrease the money supply), what can the Fed do? Discount Rate:

The Fed raises the discount rate

If the fed wants to decrease the amount of money lent by banks (decrease the money supply), what can the Fed do? Reserve Requirement:

The Fed raises the reserve requirement

If the fed wants to decrease the amount of money lent by banks (decrease the money supply), what can the Fed do? Open Market Operations:

The Fed sells bonds (securities)

Who issues coins?

The U.S. Mint

Who issues paper currency?

The district Federal Reserve Banks

If the Fed wants to decrease the money supply, will they use a tight or easy monetary policy?

Tight Monetary Policy

Why does the Fed rarely change the reserve requirement?

it can be disruptive to the whole banking system

What is the discount rate?

it is the rate of interest that banks charge to loan other financial institutions