chapter 15

The interest rate that commercial banks charge each other for very short-term loans is called the

federal funds rate

Changes in interest rates, all else held constant, cause a shift in

the aggregate demand curve, but not the investment demand curve

The Federal Open Market Committee (FOMC)

Sets policy on the sale and purchase of government bonds by the Fed

Members of the federal reserve board of governors are

appointed by the president to staggered 14-year terms

If the Fed buys government 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 System performs many functions but its most important one is

controlling the money supply

If the Fed were to reduce the reserve requirement, we would expect ________.

lower interest rates, an expanded GDP, and a higher rate of inflation

The purchase and sale of government securities by the Fed is called ________.

open market operations

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure

the purpose of the expansionary monetary policy is to increase

real GDP

The Federal Reserve can increase aggregate demand by ________.

reducing the discount rate

A television report states: "The Federal Reserve will lower the discount rate for the fourth time this year." This report indicates that the Federal Reserve is most likely trying to ________.

stimulate the economy

Assume that there is a 25% reserve requirement and that the Federal Reserve buys $4 billion worth of government securities. This action has the potential to increase the money supply by a maximum of ________.

$16 billion

Which of the following will increase commercial bank reserves?

The purchase of government bonds in the open market by the Federal Reserve Banks.

Which of the following best describes the cause-and-effect chain of an expansionary monetary policy?

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

The Federal Reserve System consists of which of the following?

Board of governors and the 12 Federal Reserve Banks

The lending ability of commercial banks increases when the ________.

Fed buys securities in the open market

If the Board of Governors of the Federal Reserve System increases the reserve requirement, this change will ________.

decrease the excess reserves of member banks and thus decrease the money supply

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ________ ________ investment spending.

decrease; increase

An increase in the money supply, all else held constant, usually

decreases the interest rate and increases the aggregate demand