Test 4 Chapter 15: Monetary Policy

illiquid bank

a bank w/ SHORT TERM liabilities greater than SHORT TERM assets

To increase the money supply in the economy, the Fed would:

carry out open market purchases and/or lower the discount rate.

demand deposits

checkable deposits (called demand deposits b/c you can access them on demand)

What monetary policy philosophy is against tying the hands of the central bank?

discretion

To offset the effect of negative growth in money velocity (), the central bank should:

increase the growth rate of the money supply

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation

The main difference between M1 and M2 is that:

M2 includes some less liquid assets in addition to the assets in M1.

Which is a limitation of monetary policy in stabilizing the economy?

Monetary policy is subject to uncertain lags.

A nominal GDP rule says ______ should always grow at a constant rate.

Mv

insolvent bank

bank w/ TOTAL liabilities greater than TOTAL assets

solvency crisis

occurs when multiple banks become insolvent

The Federal Reserve's major tool(s) to control the money supply is(are):

open market operations, discount rate lending, and paying interest on reserves.

Quantitative easing

when the Fed buys longer-term government bonds or other securities

quantitative tightening

when the Fed sells longer-term government bonds or other securities

moral hazard

when the financial institutions take on too much risk, hoping the fed will bail them out

discount rate lending

Federal Reserve lending to banks and other financial institutions

What is the overnight lending rate from one bank to another?

The Federal Funds Rate

In a fractional reserve banking system, banks hold only a fraction of their:

deposits as reserves.

When the Fed buys short-term Treasury securities, short-term interest rates:

fall

open market operations

fed buys and sells government bonds from banks on the open market

to reduce the federal funds rate...

fed buys bonds

to increase the money supply

fed buys bonds from banks

when the fed buys bonds

interest rates decrease

when the fed sells bonds

interest rates increase

The Term Auction Facility involves the Federal Reserve:

providing reserves to banks through an auction.

When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered:

solvent and illiquid

to increase the federal funds rate

the fed sells bonds

to decrease the money supply

the fed sells bonds to banks

federal funds rate

the overnight lending rate from one major bank to another

systemic risk

the risk that the failure of one financial institution can bring down other institutions as well

interest on reserves

to increase money supply, the fed lowers interest rates (fed began paying interests a bank owned on reserves in 2008)