Econ 212 Module 12
When the federal reserve announces that it is increasing the federal funds rate, it is actually going to ___________.
sell bonds on the open market until the federal funds rate rises to the new target
The most commonly used monetary policy instrument is _________.
the federal funds rate and open market operations
A given amount of Fed bond purchases will be less effective if which of the following is true?
If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts.
What is the only way investors can earn an interest rate that is more than 5% on a 1-year bond that pays $1000 in one year?
Pay a price lower than $952.38 for the bond
Assume that the economy is currently producing a level of real GDP above the full employment level of real GDP, and the government lowers taxes as part of a new economic policy. Which of the following monetary policies should the Federal Reserve undertake if it wants to encourage the economy to go to a full-employment level of output?
Raise the federal funds rate target
Which of the following make(s) the conduct of discretionary policy difficult? Select all that apply.
The Fed implements policy now that will affect the economy in the future bThe Fed has to make forecasts about the future based on current data cThe Fed is uncertain about how large the effect of a policy change will be
What are the problems with using Monetary Policy when there's a supply shock?
When the Federal Reserve undertakes an expansionary monetary policy, bank reserves and the money supply increase, loans are easier to get, the number and amount of loans increase, and interest rates fall.
What is the federal funds rate? Is this rate directly set by the Fed? Lastly, why should we care about this rate?
The interest rate that banks charge each other for such loans. The federal funds rate is not directly set by the Federal Reserve, but it is highly sensitive to the Federal Reserve's open market operations.
Which of the following would weaken the argument for the use of discretionary monetary policy and strengthen the argument for rules?
The term length for Fed board members is shortened from 14 years to 2 years.
See if you can explain the reverse process. What if the Federal Reserve wishes to reduce the money supply?
They buy and sale bonds to increase the money supply. An increase in money supply leads to an increase in the economy as a whole.
Which of the following groups serve on the Federal Open Market Committee? Select all that apply.
All members of the Board of Governors dFive of the regional Federal Reserve Bank presidents
Compare two situations:Year 1. Real GDP increases, and at the same time, interest rates increase.Year 2. Real GDP increases, and at the same time, interest rates decrease. What is a possible explanation of the difference?
An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2.
If the required reserve ratio is 5 percent and banks always try to remain fully loaned out, what will be the effect of a Federal Reserve purchase of $10 billion of bonds?
An increase in the money supply of $200 billion
Which of the following will cause a $100 million purchase of bonds by the Federal Reserve to have the larger effect on real GDP?
An increase in the sensitivity of interest rates to changes in the money supply
If the Federal Reserve System is concerned that the economy is suffering from too much unemployment, will the Federal Reserve buy or sell bonds?
Buy
If the Federal Reserve wishes to minimize the fluctuations of interest rates, what will be the resulting effects on business cycles?
In response to an increase in spending, the money supply will be increased
Imagine you are running a bank and you are deciding how much of your funds to deposit with the Fed. Your alternative to depositing funds with the Fed is to lend them to businesses and individuals. What are you likely to do if the Federal Reserve increases the interest rate that it pays on your deposits with them?
Increase reserves at the Fed and reduce loans
Banks will hold substantial excess reserves when which of the following is true?
Loans to customers look unusually risky or if interest rates are low
The economy is suffering from too much unemployment. If the Federal Reserve were to use the discount rate to address this problem, what would it do to the discount rate?
Lower
The economy is suffering from too much unemployment. If the Federal Reserve were to use the required reserve ratio to address this problem, what would it do to the required reserve ratio?
Lower
When the Federal Reserve announces that is increasing the federal funds rate, we would expect to see banks do which of the following?
Reduce their loans because they have fewer reserves due to the Fed's open market sales
What were the major factors that contributed to the 2007-2009 Recession?
a tightening of monetary policy from early 2004 continuing to early 2007, a severe failure of financial markets to work smoothly, and, as a consequence, a severe reduction in loans to a variety of businesses.
Why is the Fed known as the lender of last resort? How does the discount rate play a role in this relationship?
banks need reserves and cannot borrow from any other private lender, the Federal Reserve stands ready to make loans as a last resort.
The Federal Reserve System was set up to be a ______________ and politically ______________ institution.
decentralized; independent
What is expansionary monetary policy used for?
decrease interest rates which will increase real GDP.
What is the primary responsibility of the Federal Reserve?
maintaining a stable and effective monetary system.
What is the FOMC and what does it do? Next, what are open market operations?
manages open market operations. They are the purchase and sales of US governments
The tool most relied on by the Federal Reserve in conducting monetary policy is ____________.
open market operations
