Ch. 15 : The Federal Reserve
What are the two main policies
1) Expansionary Monetary Policy 2) Contractary Monetary policy
How is the federal reserve independent
1) Members have one 14 year term 2) They do not need congress' persmission for policies 3) They get funding from interest earnings on treasury bonds and bills
What two situations needs to occur in order for the government to directly influence Aggregate Demand?
1) Recession (high unemployment) 2) Expansion (high expansion)
What does the first guaranty bank do
1) They have loan officers 2) Deposit money (and attract wealthy depositers) 3) Buy Treasury bonds and bill
What are the three main criteria for the Federal Reserve
1) They regulate banks 2) They Control the money supply 3) Are Politically Indepdent
Why does the fed focus on the open market operations
1) it's a convinent signal of the money supply 2) responds quickly to actions by the fed 3) con be monitered on a day to day basis
How is the reserve ratio determined
1) minimum legal reserve ratio 2) banks desire for liquidity
How does the federal banks control the money supply
1) open market operations 2) they change interest rates paid on bank reserves
Define a liquid asset
Anything that can be widely accepted as payment (gold/silver, deerskin)
How does the federal reserve influence the economy?
By changing the money supply
M1 has
Currency + Checkable Deposit
M2 has
M1 + All 3 savings types
M3 has
Monetary Base (Reserves + Currency)
Where do people have the most money?
Savings accounts
What has the strongest effect on Aggregate Demand
The Federal Reserve
How does the Federal Reserve make money
The Fractional Reserve Bank
What are the two most important institutions
The Supreme Court and The Federal Reserve
The Fractional Reserve Bank
a banking system that keeps only a fraction of funds on hand and lends out the remainder
Define Reserves
aka the banks money. It's the money banks are holding. (Bank Vault + Deposit Account @ The Federal Reserve )
What does the fractional reserve banking system do
banks hold on a fraction of their deposits in reserves and lend the rest
What is the difference between a savings account and a checking account
checking accounts are primarily for accessing your money for daily use while savings accounts are primarily for saving money.
Is the banks RR is less than 10% then it is:
comfortable making loans
Which of the following tools are available to the U.S. Federal Reserve Bank (the Fed)? a) The federal funds rate b) Loans c) Payments of interest on reserves d) All of the above.
d
Aggrgate Demand _____ with contracytory policy
decrease
What is the least liquid asset
houses, credit cards
Aggregate demand _______ with expansionary policy
increase
What does the expansionary policy do
it decreases the interest rate
What does the contractaory policy do?
it increases interest rate
What are the most liquid asset?
money
what is the federal funds rate
the average interest rate that banks charge each other
What is the federal reserve
the central bank of the US
what can banks only participate in
the federal funds market
What is the reserve ratio
the fraction of deposits that banks hold as reserves (usually less than 1%)
Define the money supply
the quantity of money available in the economy
What is the monetary base
the sum of currency in circulation and bank reserves deposits held by banks and other depository institutions in their accounts at the Federal Reserve
What did banks do before the great recession
they held only 1% of our deposits, and put the rest in stock
What are open market operations
they will either buy or sell US treasury seecurities with banks
What is the purpose of the federal reserve
to regulate the money supply in order to create a stable economy, and to influence the economy
People would be more likely to invest their savings in bank alternatives if the reserve ratio is 100%. --> true or false
true
if the banks RR is greator than 10% then it is:
uncomfortable making loans
What is quantitative easing
when the fed moved to buys longer term bonds to inject more money into the economy
what is quantitative tightening
when the fed sells more longer term government bonds
When do we do contractionary monetary policy?
when the us is experiencing inflation
When do we use the expansion policiy
when we're in a recession
What does the federal funds market do
where banks lend and borrow with other banks
Are reserves held by banks at the fed the most liquid asset?
yes