Economics: Review for Chapter Eleven

Although the Fed is an independent organization, what are two specific checks on its power?

1. Congress may remove members from the Fed's Board of Governors "for cause" 2. The Federal Reserve System could be abolished by an act of Congress, just as it was created by one.

For what two reasons will the money supply not ever be fully multiplied?

1. Financial institutions will not lend all of their excess reserves. 2. Not all recipients of the loaned money will redeposit the entire amount.

In what three ways is the Fed independent of outside control?

1. Politically 2. Financially 3. Operationally

The Fed's changing of the supply of money affects the economy in what two areas?

1. Price 2. Interest rates

Who are the three creators of money in the United States?

1. The US Treasury 2. The financial institutions that make up the US financial market 3. The Federal Reserve Bank

List the six functions of the Federal Reserve system.

1. To provide a uniform currency 2. To regulate member banks 3. To clear checks and debit card transactions 4. To act as the nation's fiscal agent 5. To serve as the banker's bank 6. To create money

Into how many districts did the Federal Reserve Act divide the nation, and why?

1. Twelve Federal Districts 2. Because Congress understood that each section of the nation had diverse financial needs and did not want any region to be at the financial mercy of another.

If the reserve requirement is 8 percent and the money supply is $500 billion, what dollar amount of government securities will the Federal Reserve need to purchase if it wants to increase the money supply by 10 percent?

?!?

If the Fed were to decrease the discount rate, what kind of monetary policy would it be following?

A loose monetary policy

What is a run on a bank? Why is it a problem? How does the Fed attempt to prevent or control it?

A run on a bank occurs when all of the clientele of a given bank rush to withdraw their money--usually because of panic. It's a problem because our banking system functions on the assumption that everyone will not try to withdraw their funds at the same time, and as a result of such, banks don't keep everyone's cash on hand, but instead, loan it out. The Fed attempts to prevent runs on banks by acting as the banker's bank, promising to lend cash to banks when they run out of funds.

Which would decrease the money supply, an increased or decreased reserve requirement?

An increased reserve requirement

Why does the Fed not continually expand the money supply?

Because doing so would accelerate the economy too much, and inflation would skyrocket.

Give the position or title of the most influential person at the Federal Reserve System.

Chair of the Fed.

What is the difference between a tight and a loose monetary policy?

In a tight monetary policy, the Fed uses one or more of the tools at its disposal to reduce the money supply. In a loose monetary policy, on the other hand, the Fed does what it can to increase the money supply.

To decrease the money supply, how would the Fed change the discount rate?

It would increase the discount rate.

Which method of changing the money supply does the Fed use most often?

Open market operations

Who or what is responsible for guiding the Fed?

The Board of Governors

In what way is the Federal Open Market Committee more powerful than any foreign army that could march against the United States?

The FOMC provides the US Treasury with the necessary loans it needs to function. Without these loans, our government would be rendered ineffective.

Explain the money multiplier effect.

The money multiplier effect is the expansion of the money supply as a result of commercial banks' lending their depositors' money to others.