My ECON Test 3 Quizlet

Public Interest View

a theory of central bank decision making that holds that officials act in the best interest of the public

economic growth

increases in the economy's output of goods and services over time; a goal of monetary policy

When the Federal Reserve increases the federal funds rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________.

increases; falls; increases

If the Fed lowers the federal funds rate, which of the following occurs?

investment increases

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

Primary dealers in open mark operations are

usually investment banks, securities dealers, and the securities departments of commercial banks

The Federal Reserve Act divided economic power within the Federal Reserve System in three ways

- Bankers and business - States and Regions - Government and Private Sector

The Federal ReserveAct created four groups within the system to perform different duties

- Federal Reserve Banks - Private commercial member banks - The Board of Governors - The Federal Open Market Committee (FOMC)

Federal Open Market Committee (FOMC)

- The 12-member Federal Reserve committee that directs open market operations. - BOG serves as chair of the FOMC - meets in Washington DC 8 times a year

Arguments for independence and arguments against independence -454-5

- The main argument for Fed independence is that monetary policy—which affects inflation, interest rates, exchange rates, and economic growth—is too important and technical to be determined by politicians. - Another argument for Fed independence is that complete control of the Fed by elected officials, which would increase the money supply, lower interest rates, and fuel inflation. - debates focus on proposals to limit Fed independence in some respects, not to eliminate its formal independence.

3 New Tools To Manage the Federal Funds Rate

1. Interest on bank reserve balances 2. Overnight reverse repurchase agreement facility 3. Term Deposit Facility

6 monetary policy goals

1. Price stability 2. High employment 3. Economic growth 4. Stability of financial markets and institutions 5. Interest rate stability 6. Foreign-exchange market stability

2 New Tools When Facing a Zero Lower Bound on the Federal Funds Rate

1. Quantitative easing 2. Forward Guidance

The Fed's 3 Traditional Policy Tools

1. open market operations 2. discount policy 3. reserve requirements

Categories of Discount Loans

Discount loans available to healthy banks experiencing liquidity problems

The interest rate banks charge each other on overnight loans is called the

Federal Funds Rate

Monetary policy decisions are made by the

Federal Open Market Committee

Is the opportunity cost to banks of reserve requirements (the "reserve tax") likely to be higher during a recession or during an economic expansion?

High interest rates also means high opportunity costs of holding reserves for the Fed earning low interest rate SO when there is an economic expansion and interest rates increases, the opportunity cost of hold the reserves are higher

Central Bank Independence - 457-460

Many analysts believe that an independent central bank improves the economy's performance by lowering inflation without raising output or employment fluctuations.

forward guidance

Statements by the Federal Open Market Committee (FOMC) about how it will conduct monetary policy in the future

open market sale

The Fed's sale of securities, usually Treasury securities (reduce monetary base)

open market operations

The Federal Reserve's purchases and sales of securities, usually U.S. Treasury securities, in financial markets.

Discount Policy

The discount rate is the interest rate paid on money banks borrow from the Fed.

Federal Reserve Act

This act established the Federal System WHICH divided the United States into 12 Federal Reserve districts, each of which has a Federal Reserve Bank

Dual Mandate

a central bank mandate that features two co-equal objectives: price stability and maximum employment

quantitative easing

a central bank policy that attempts to stimulate the economy by buying long-term securities

The Taylor Rule

a monetary policy guideline developed by economist John Taylor for determining the target for the federal funds rate

Principal-agent view

a theory of central bank decision making that holds that officials maximize their personal well-being rather than that of the general public

Inflation targeting requires that the central bank

avoid changing the amount of the monetary base

bank reserves

bank deposits with the Fed plus vault cash

To fight a recession, an appropriate monetary policy would be that the Fed conducts an open market operation that ________ government securities, ________ the federal funds rate, and ________ aggregate demand.

buys; lowers; increases

The Fed ________ influence the real interest rate in the short run and ________ influence the real interest rate in the long run.

can; cannot

vault cash

cash held by a bank

Under a gold standard, the central bank is willing to

convert its currency into gold on demand.

currency-deposit ratio

cr = C/D

Banking System

creates the checking accounts component of M1 measure of MS

Currency in M1

currency held by nonbank public currency in circulation - vault cash= currency in M1

If the Fed carries out an open market operation and buys U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.

falls; increases

Suppose the Fed raises the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i.short-term interest rates rise ii. long-term interest real interest rate rises iii.aggregate demand decreases iv.inflation rate decreases

i-ii-iii-iv

Which of the following statements are correct? i.Congress does not play a role in making monetary policy decisions ii.The FOMC meets eight times a year to make monetary policy decisions iii.The President of the United States appoints members and the Chairman of the Board of governors but has little other formal authority over monetary policy

ii and iii

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? i.government expenditure on goods and services and taxes ii.the government budget deficit or surplus iii.changes in the federal funds rate

iii. Fed is responsible for monetary policy only, and the three monetary policy tools are: Open market operations, Discount rate and Reserve ratio, using which Fed wants to impact the federal funds rate in the market for reserves.

Factors that motivate the Feds (Principal Agent View)

incentive to maximize the value of shareholders' (prinicpals') may be weak so the agents rather maximize their personal well being rather than the general public.

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)

legislation passed in 2010 that was intended to reform regulation of the financial system. (restrict the Fed's role and stricter regulations)

The Federal Reserve fears that the United States economy is growing too slowly and is stuck in a recession. To move the economy back to its potential GDP, the most likely policy action for the Fed is to ________ the federal funds and thus ________

lower; increase aggregate demand

When the economy is in a recession, the Fed can ________ the federal funds rate, which ________ aggregate demand and ________ real GDP.

lower; increase; increase

If the Fed is concerned about a possible recession, it ________ the federal funds rate, which ________ the quantity of money and ________ the amount of bank loans.

lower; increases; increases

If the Fed is concerned about a possible recession, it ________ the federal funds rate and, in response, long-term interest rates ________ by a ________ amount than the change in short-term rates.

lowers; decrease; smaller

Federal Reserve Act required all ______ banks to become members banks of the Federal Reserve.

national

Federal Reserve Bank

one of 12 district banks of the Federal Reserve System that, among other activities, conduct discount lending

currency in circulation

paper money circulating outside of the Fed

multiple deposit creation

part of the money supply process in which an increase in bank reserves results in rounds of bank loans and creation of checkable deposits and an increase in the money supply that is a multiple of the initial increase in reserves

2 main monetary policy

price stability & high employment

Depository Institutions Deregulation and Monetary Control Act (DIDMCA)

required that all banks maintain reserve deposits with the Fed on the same terms

required reserves

reserves that the Fed requires banks to hold against demand deposit and NOW account balances (since March 2020 banks are not required to hold reserves)

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.

rises; decrease

Factors that motivate the Feds (Public View)

seeks to make decision based on the publics interest

fed's target funds rate

target interest rate set by the Federal Open Market Committee (FOMC)

A guiding principle of the 1913 Federal Reserve Act was

that one constituency (for example, finance, manufacturing, commerce, or agriculture) would not be allowed to exploit the central bank's economic power at the expense of another constituency.

The steps in the transmission of monetary policy are

the Federal Reserve lowers the federal funds rate, which lowers the real interest rate, and leads to an increase in aggregate demand

In the United States,

the Federal Reserve sets monetary and fiscal policies.

Federal Reserve System

the central bank of the United States - responsible for controlling money supply and regulating the banking system

reserve requirements

the fed's regulation that banks must hold a fraction of checkable deposits as vault cash or deposits with the Fed

open market purchase

the federal reserve's purchase of securities (raises monetary base)

Board of Governors

the governing board of the Federal Reserve System, consisting of seven members appointed by the president of the United States

federal funds rate

the interest rate that banks charge each other for loans

Discount rate

the interest rate the Federal Reserve charges on discount loans

discount window

the means by which the Fed makes discount loans to banks, serving as the channel for meeting the liquidity needs of banks

required reserve ration

the percentage of checkable deposits that the Fed specifies that banks must hold as reserves

Discount Policy

the policy tool of setting the discount rate and the terms of discount lending

simple deposit multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves

Monetary base (or high-powered money)

the sum of bank reserves and currency in circulation

political business cycle

the theory that policy makers will urge the Fed to lower interest rates to stimulate the economy prior to an election

cyclical unemployment

unemployment caused by a business cycle recession

frictional unemployment

unemployment that occurs when people take time to find a job