Banking & the Fed Test Review Questions (Mr. Fortner)

What decisions does the FOMC make about money?

level of interest rates & growth of the money supply oversees the open market operations

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 means of exchange

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

open market operations (transactions) buying and selling bonds

What is representative money?

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

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

poor economic growth declining GDP

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

prices are rising inflation

Who issues paper currency?

the district Federal Reserve Banks

If the fed wants to increase the amount of money lent by banks (increase the money supply), what can the fed do?

the fed decrease the reserve requirement fed buys bonds the fed decreases the discount rate

What is a tight monetary policy? How does the Fed create it?

the fed decreases the money supply by raising interest rates which discourages people from borrowing as much money raises the reserve requirement and/ or sells securities and/ or raises the discount rate

What is an easy monetary policy? How does the Fed create it?

the fed increases the money supply by the lowering interest rates, thus encouraging investment spending lowers the reserve requirement and/ or buys securities and/ or lowers 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?

the fed raises the reserve requirement the fed sells bonds the fed raises the discount rate

What is the discount rate?

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

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

tight

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

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

1. Fractional Reserve Requirement 2. Open Market Transactions 3. Discount Rate

What tool is hardly used by the Fed?

Reserve Requirement it is disruptive to the banking system

Who issues coins?

U.S. Mint

What are open market operations?

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

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

decrease

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

increase

Why does the Fed rarely change the reserve requirements?

it can be disruptive to the whole banking system