Econ Chapter 16
what is the makeup of the Federal Reserve Districts?
Each district is made up of more than one state. Federal Reserve Districts include a mixture of agricultural, manufacturing, and service industries as well as rural and urban areas.
rate the Federal Reserve charges for loans to commercial banks
discount rate
the monetary policy that increases the money supply
easy money policy
in banking, reserves of cash more than the required amounts
excess reserves
interest rate banks charge each other for loans
federal funds rate
what is the most-used instrument for controlling week-to-week changes in the money supply?
open market operations
the time it takes for monetary policy to have an effect
outside lag
the rate of interest that banks charge on short-term loans to their best customers
prime rate
the ratio of reserves to deposits required of banks by the Federal Reserve
required reserve ratio (RRR)
Which of the following is one way the Federal Reserve Bank serves the government?
selling government securities
who appoints the members of the Board of Governors of the Federal Reserve?
the U.S. President
What monetary policy should be implemented to correct an inflationary economy?
tight monetary policy
the monetary policy that decreases the money supply
tight money policy
Why does the Federal Reserve alter monetary policy?
to lessen the effect of natural business cycles
why are the Board of Governors of the Federal Reserve appointed for staggered fourteen-year terms?
to protect board members from political pressures
what was one reason the U.S. government started a Federal Reserve System?
to provide consumers with access to funds for business expansion
The Federal Reserve System does the following:
Provides banking and fiscal services to the federal government, provides banking services to member and nonmember banks, regulates the banking industry, tracks and manages the national money supply to meet current demand and to stabilize the economy
The amount of money that firms or individuals hold depends generally on four factors:
1. Cash needed on hand 2. Interest rates 3. Price levels in the economy 4. General level of income
What is the relationship between interest rates and demand for money?
As interest rates decrease, demand for money increases.
the seven-member board that oversees the Federal Reserve System
Board of Governors
What is likely to be the best approach to a recession that is expected to turn into an expansion in a short time?
Do nothing and let the economy fix itself.
research arm of the Federal Reserve
Federal Advisory Council (FAC)
Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply
Federal Open Market Committee (FOMC)
the twelve banking districts created by the Federal Reserve Act
Federal Reserve Districts
This dilemma, in which the central bank is unable to encourage lending with rate cuts, is called "pushing on a string."
If expansionary policies are enacted too late, the economy may have slowed down so much that businesses are reluctant to borrow at any rate for new investment
Why does the Fed rarely increase reserve requirements?
It can be disruptive to the whole banking system
Which of the following is an example of inside lag in monetary policy?
Members of the Board of Governors refuse to lower the discount rate until several months after a recession has begun.
Which of these situations is most likely to cause the Fed to introduce a tight money supply?
The economy is expanding quickly and inflation is a concern.
Even though it can only alter the money supply, the Fed has a great impact on the economy:
The money supply determines the interest rate, and the interest rate determines the level of aggregate demand. Remember that aggregate demand represents the relationship between price levels and quantity demanded in the overall economy. The level of aggregate demand helps determine the level of real GDP.
Bank examiners are _____.
authorized to force banks to sell off investments that they consider excessively risky
a company that owns more than one bank
bank holding company
What does fiscal policy include?
changes in government spending and taxation
the process by which banks record whose account gives up money and whose account receives money when a customer writes a check
check clearing
delay in implementing monetary policy
inside lag--they occur because the economy's performance is not always immediately obvious, even to economists, and because it takes time to gather, analyze, and react to economic data with a new policy.
the belief that the money supply is the most important factor in macroeconomic performance
monetarism
the actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation in the economy
monetary policy
the process by which money enters into circulation
money creation
the amount of new money that will be created with each demand deposit; 1 ÷ RRR
money multiplier formula
total assets minus total liabilities
net worth
the buying and selling of government securities to alter the supply of money
open market operations