Macro Chapters 14 & 15
How long are the members of the Federal Reserve Board appointed for?
14 year terms
When was the Federal Reserve System created?
1913
Who does the Federal Open Market Committee (FOMC) include?
7 Board of Governors members, president of the New York Federal Reserve bank, and the 4 remaining presidents from 11 remaining Federal Reserve banks serving on a 1 year rotating basis
What is the Federal Open Market Committee (FOMC) made up of?
7 members of the Board of Governors, president of the New York Federal Reserve bank, and the 4 other federal reserve bank presidents on a rotating basis
The Federal Reserve System consists of which of the following?
Board of Governors and the 12 Federal Reserve Banks
Which group sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, bonds)?
Federal Open Market Committee (FOMC)
If checkable deposits decrease by $40 billion, and balances in the money market mutual funds increase by $40 billion...
M1 money supply will decline, M2 money supply will remain unchanged
Assuming no other changes, if checkable deposits increased by $40 billion and currency in circulation decreased by $40, then...
M1 money supply will not change
currency held in the vault of the First National Bank is
NOT counted as part of the money supply; money in banks/federal institutions are not counted in the money supply
Who is paper money (currency) in the US issued by?
The Federal Reserve System
expansionary monetary policy is a fed policy where
administered rates may be lowered to encourage bank and nonbank lending
compared to fiscal policy, monetary policy has a much shorter
administrative lag
when the interest on reserve balances is LOWER than the federal funds rate, how will banks respond?
banks will withdraw from their account at the Federal Reserve Bank and lend the funds in the federal funds market
which best describes how IORB serves as a reservation rate
because IORB is a risk-free option, banks should not be willing to lend their funds for less than they can earn on their reserve balances
how does the federal reserve change the money supply
by providing forward guidance about how it intends to conduct monetary policy
money supply is backed
by the governments ability to control the supply of money and therefore keep its value relatively stable
in the US, the M1 money supply includes
coins, paper currency, checkable deposits, and saving deposits
Where does the Federal Deposit Insurance Corporation (FDIC) insure deposits?
commercial banks & thrifts
What does the Board of Governors do?
coordinates policies for the 12 Federal Reserve Banks
if the fed wants to encourage bank lending it will
decrease the IORB rate
which is a monetary policy intended to combat a recession?
decrease the federal funds target range to shift the AD curve rightward
how will raising the ON RRP rate effect the money supply
decrease the money supply
Other things equal, an excessive increase in money supply will
decrease the purchasing power of each dollar
interest rate in which the fed lends to banks
discount rate
the rate banks pay for loans from the Fed
discount rate
which monetary policy tool serves as a ceiling for the federal funds rate?
discount rate
when the fed uses restrictive monetary policy, the prices of government bonds
fall
does the fed's dual mandate give more weight to full employment target or inflation target
full employment b/c very bit of cyclical unemployment represents personal misery for those left unemployed
if the fed increases the IORB rate held at the fed, what will banks do?
hold even more reserves in their account at the fed which reduces the amount it is willing to lend
other things equal, a contractionary monetary policy during a period of demand-pull inflation will
increase interest rates, decrease investment, decrease aggregate demand
The Federal Reserve System is an
independent agency of government
which monetary policy tool implementation tool is the primary tool the Fed uses to steer the federal funds rate into the FOMC's target range?
interest on reserve balances (IORB)
federal funds rate
interest rate that banks charge other banks
the value of money varies
inversely with the price level
what are the advantages of monetary policy over fiscal policy?
isolation from political pressure, the subtlety with which it can be used, and the quickness with which it can be used
What actions does the Federal Reserve System perform?
issues paper currency, lends money to banks and thrifts, and provides financial services to the federal government
which best describes how the FOMC conducts monetary policy during an inflationary period to achieve its price stability objective?
it increases the target range for the federal funds rate
The amount of money reported as M2 is
larger than the amount reported as M1
how does the FOMC conduct monetary policy to increase employment during a recession to achieve maximum employment objective?
lower target range to federal funds rate --> decreases the IORB rate, ON RRP rate, and the discount rate
if you write a check on a bank to purchase a used Honda Civic, you are using money primarily as...
medium of exchange
equilibrium interest rate
money supply = money demand
neutral monetary policy
money supply and interest rates are left as they are
is monetary policy more effective in reducing inflation or combating recession
more effective in controlling inflation than in moving the economy out of a recession
what are the tools the Fed can use to alter the money supply
open market operations, providing forward guidance, or changing any of the 3 administered rates
which is a tool of monetary policy?
overnight reverse repurchase agreement facility (ON RRP)
which monetary policy tool is a supplementary tool that sets a floor for the federal funds rate?
overnight reverse repurchase agreement facility (ON RRP)
what are the Fed's dual mandate goals
price stability and maximum employment
fed can increase aggregate demand by
reducing the 3 administered rates
Placing earnings in a savings account is using money as which function?
store of value
what role do open market operations play in monetary policy?
the Fed uses open market operations to ensure that the level of reserves remains ample
if the inflation rate is 7% and the unemployment rate is 3%...
the Fed will most likely choose a restrictive monetary policy
in the US economy, the money supply is controlled by
the Federal Reserve System
Who are the members of the Board of Governors selected by?
the US president and confirmed by the Senate
what "backs" the value of money in the United States?
the acceptability of it as a medium of exchange
contractionary monetary policy is designed to shift
the aggregate demand curve leftward
what is the effective federal funds rate
the equilibrium interest rate determined in the federal funds market
When the FOMC conducts monetary policy, it sets the target range for
the federal funds rate
the interest rate that banks charge other banks for loans is
the federal funds rate
monetary policy is the responsibility of
the federal reserve system
The more independent the central bank...
the lower the average annual rate of inflation
what happens is the federal reserve buys government securities
the money supply will increase
What is the important reason why members of the Federal Reserve Board of Governors are given 14 year terms?
to insulate members from political pressures that could result in inflation
An $80 price tag is an example of what money function?
unit of account
Stock market price quotations best exemplify what money function?
unit of account
if you are estimating your total expenses for school next semester, you are using money primarily as...
unit of account
What does the Federal Open Market Committee (FOMC) do?
votes on the Fed's monetary policy and directs the purchase or sale of government securities
Jimmy has $2,900 in his checking account, he uses his debit card to withdraw $290 of cash, by what amount did the M1 money supply change?
zero because withdrawing decreased M1 by 290, but he increased M1 by 290 by getting cash
