Economics Chapter 11
What is an open market operation?
An action whereby the Fed purchases or sells governmental securities in the open market to inject money into or withdraw from the economy.
How does the Federal Open Market Committee (FOMC) affect the money supple?
By buying and selling governmental securities (such as Treasury bills, notes, and bonds).
What is a central bank and when was it introduced?
Introduced in 1913, the central bank is
What is monetary policy?
It is the increasing or decreasing of the money supply to influence the economy.
Who guides the Federal Reserve System?
The Board of Governors (7 members)
J.P. Morgan
"Formidable Financer"
What is a reserve requirement?
a specified percentage of their deposits
How is the Board of Governors appointed?
selected by the president and confirmed by Congress
What does "fiscal agent mean"?
the government's bank
If the Fed has concerns about a possible recession and rising unemployment, what will they do?
they might enact a loose monetary policy
What are the two possible methods for clearing a check?
1. Correspondent banking (two banks have numerous regular transactions between them and consequently hold deposits with each other) 2. Clearinghouse ( )
How can the Fed change the amount of money subject to the money multiplier effect or change the multiplier?
1. change the discount rate 2. change the reserve requirement 3. buy and sell securities in the open market
Why won't the participants in the money multiplier effect ever fully multiply the money?
1. financial institutions will not lend all their excess reserves 2. not all recipients of loaned money will redeposit the entire amount
What is the Fed's job as the government's fiscal agent?
1. holds the US Treasury's checking account 2. makes loans to Treasury (by having FOMC purchase bonds) 3. supplies information to the president and Congress through the Board of Governors
How do changes in the money supply affect the economy?
1. prices 2. interest rates
How many members does the FOMC have?
12, the seven from the Board of governors and 5 of the Federal Reserve district dank presidents
What is the money multiplier equation?
D x 1/rr = increase in money supply (D= initial deposit, rr= reserve requirement)
What is the money multiplier effect?
It is the expansion of the money supply as a result of commercial banks' lending their depositors' money to others.
What did the Monetary Control Act of 1980 do?
It required all financial institutions to abide by the Fed's required reserve regulations
Why doesn't the Fed continually print more money to stimulate the economy?
It would accelerate the economy too much.
In what three ways is the Federal Reserve System independent?
Politically Financially Operationally
What is the Federal Reserve System?
The "Fed" is a government institution responsible for: overseeing the issue of currency, regulating bank activity, and providing banking services to the nation's commercial banks.
How many districts did the Federal Reserve Act divide the country into, and why?
The Federal Reserve Act divided the nation into 12 districts because they realized that each section of the nation had diverse financial needs and they did not want any region to be at the financial mercy of another.
What does the Fed do to "cool down" an overheated economy?
They decrease the growth rate of the money supply, causing interest rates to rise.
What did Congress seek to do with the original Federal Reserve Act?
They sought to keep the Federal Reserve System independent from outside influence.
What three organizations create money?
US Treasury, financial institutions, and the Federal Reserve System
What six national economic services does the Federal Reserve System preform?
provides a uniform currency regulates member banks clears checks and debit card transactions acts as nation's fiscal agent serves as the banker's bank creates money
If the Fed has concerns about high inflation, what will they do?
they might enact a tight monetary policy