Ch. 15 : The Federal Reserve

What are the two main policies

1) Expansionary Monetary Policy 2) Contractary Monetary policy

How is the federal reserve independent

1) Members have one 14 year term 2) They do not need congress' persmission for policies 3) They get funding from interest earnings on treasury bonds and bills

What two situations needs to occur in order for the government to directly influence Aggregate Demand?

1) Recession (high unemployment) 2) Expansion (high expansion)

What does the first guaranty bank do

1) They have loan officers 2) Deposit money (and attract wealthy depositers) 3) Buy Treasury bonds and bill

What are the three main criteria for the Federal Reserve

1) They regulate banks 2) They Control the money supply 3) Are Politically Indepdent

Why does the fed focus on the open market operations

1) it's a convinent signal of the money supply 2) responds quickly to actions by the fed 3) con be monitered on a day to day basis

How is the reserve ratio determined

1) minimum legal reserve ratio 2) banks desire for liquidity

How does the federal banks control the money supply

1) open market operations 2) they change interest rates paid on bank reserves

Define a liquid asset

Anything that can be widely accepted as payment (gold/silver, deerskin)

How does the federal reserve influence the economy?

By changing the money supply

M1 has

Currency + Checkable Deposit

M2 has

M1 + All 3 savings types

M3 has

Monetary Base (Reserves + Currency)

Where do people have the most money?

Savings accounts

What has the strongest effect on Aggregate Demand

The Federal Reserve

How does the Federal Reserve make money

The Fractional Reserve Bank

What are the two most important institutions

The Supreme Court and The Federal Reserve

The Fractional Reserve Bank

a banking system that keeps only a fraction of funds on hand and lends out the remainder

Define Reserves

aka the banks money. It's the money banks are holding. (Bank Vault + Deposit Account @ The Federal Reserve )

What does the fractional reserve banking system do

banks hold on a fraction of their deposits in reserves and lend the rest

What is the difference between a savings account and a checking account

checking accounts are primarily for accessing your money for daily use while savings accounts are primarily for saving money.

Is the banks RR is less than 10% then it is:

comfortable making loans

Which of the following tools are available to the U.S. Federal Reserve Bank (the Fed)? a) The federal funds rate b) Loans c) Payments of interest on reserves d) All of the above.

d

Aggrgate Demand _____ with contracytory policy

decrease

What is the least liquid asset

houses, credit cards

Aggregate demand _______ with expansionary policy

increase

What does the expansionary policy do

it decreases the interest rate

What does the contractaory policy do?

it increases interest rate

What are the most liquid asset?

money

what is the federal funds rate

the average interest rate that banks charge each other

What is the federal reserve

the central bank of the US

what can banks only participate in

the federal funds market

What is the reserve ratio

the fraction of deposits that banks hold as reserves (usually less than 1%)

Define the money supply

the quantity of money available in the economy

What is the monetary base

the sum of currency in circulation and bank reserves deposits held by banks and other depository institutions in their accounts at the Federal Reserve

What did banks do before the great recession

they held only 1% of our deposits, and put the rest in stock

What are open market operations

they will either buy or sell US treasury seecurities with banks

What is the purpose of the federal reserve

to regulate the money supply in order to create a stable economy, and to influence the economy

People would be more likely to invest their savings in bank alternatives if the reserve ratio is 100%. --> true or false

true

if the banks RR is greator than 10% then it is:

uncomfortable making loans

What is quantitative easing

when the fed moved to buys longer term bonds to inject more money into the economy

what is quantitative tightening

when the fed sells more longer term government bonds

When do we do contractionary monetary policy?

when the us is experiencing inflation

When do we use the expansion policiy

when we're in a recession

What does the federal funds market do

where banks lend and borrow with other banks

Are reserves held by banks at the fed the most liquid asset?

yes