AP Econ Interest Rates and Monetary Policy

assuming the fed sells $40 mill in bonds to commercial banks and RR is 20%, the effect will be to reduce

the potential money supply by $200 million

if the fed buys $1 in gov't securities from bank A, then the effect would be an increase in

bank A's excess reserve

assume the RR is 25%, if the fed sells $120 mill in bonds to the public, the money supply will

decrease by $120 and the maximum money lending potential of commercial banking system will decrease by $480 (120 x 1/.25)

tools of monetary policy for altering reserves of commercial banks

discount rate, reserve ratio, open market operations, and term auction facility

assume the RR is 20%, if the fed buys $80 in bonds, the money supply will

increase by $80, maximum will increase by another $320 (80 x 1/.2 - 80)

a decrease in interest rate will cause

increase in the amount of money held as an asset

bond prices and interest rate are ___ related

inversely

The transactions demand for money will shift to the

left when nominal GDP decreases

how does the federal reserve alter the nation's money supply?

manipulating the size of excess reserves held by commercial banks

Accurate description when monetary authorities increase size of commercial banks' excess reserve:

money supply increased, which decreases interest rate, and causes investment spending, output and employment to increase

the most frequently used monetary device for achieving price stability

open market

when would the quantity of money demanded increase

when the interest rate decreases and nominal GDP increases

assume there's 25% RR and fed buys $4 bill bonds. this action has the potential to increase money supply by a maximum of

$16 billion, but also by $16 billion if the securities are purchases directly from commercial banks

assume there's 25% RR and fed buys $200 mill. what's lending maximum

$600, but by $800 if the securities are purchases DIRECTLY from commercial banks

level of GDP will tend to increase when

The Federal Reserve buys government securities in the open market

discount rate

The interest rate on the loans (that the Fed makes) to banks

when the interest rate falls

Total amount of money demanded increases

A consumer holds money to meet spending needs

Transactions demand for money

lowering reserve ratio

Turns required reserves into excess reserves

the fundamental objective of monetary policy is to assist the economy in achieving

a full employment, noninflationary level of total output

major purpose of fed buying gov't securities is to

allow banks to increase their lending

in the cause-effect chain linking changes in the banks' excess reserves and the resulting changes in output and employment in the economy:

an increase in the money supply will decrease rate of interest

lower the reserve ratio

available funds increases & spending increases (increases excess reserves)

if the fed buys gov't securities from commercial banks in the open market,

commercial banks give the securities to the fed, and the fed increases the banks' reserves

the federal reserve can increase aggregate demand by

reducing discount rate

full employment and high inflation

sell gov't securities in open market and decrease gov't spending

the fed could reduce the money supply by

selling gov't bonds in open market

if the fed sells gov't securities to the public,

the fed gives the securities to the public, the public pays for the securities by writing checks that when cleared will decrease commercial bank reserves at the fed

problem: high unemployment, weak economic growth

the fed would buy gov't securities and lower discount rate

fed funds rate

the interest rate thank banks charge one another for the loan of excess reserves

open market operations

the purchase and sale of U.S. government bonds by the Fed

What occurs when monetary authorities sell bonds

there is a decrease in size of commercial banks' excess reserve, the money supply decreases, and interest rates rise, decreases in investment spending and real GDP

a tv reports "the fed will lower discount rate for the fourth time" this shows that the fed is

trying to stimulate the economy