Macro Final exam (CH 14,15,16)

what is the federal reserve?

banking system 1.)12 federal reserve banks 2.)serve as the central bank 3.)quasi-public banks 4.)bankers bank

how is money used as a medium of exchange?

buy/sell goods

what is vault cash?

cash held by the bank

what is the reserve ratio?

changes the money multiplier

what is an equilibrium interest rate

changes with shifts in money supply and money demand

A decrease in the reserve ratio increases the:

amount of excess reserves in the banking system.

the federal funds market experiences ____

conflicting goals with a main goal to earn a profit

how is money used as a unit of account?

goods valued in dollars

what is the most important tool of monetary policy?

open market operations

the discount rate was a ____ tool

passive (interest on reserves)

what affects the purchasing power of money?

prices

what does hyperinflation do to money?

renders money unacceptable

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government:

surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

if real GDP= potential GDP and inflation = 2% then,

targeted federal funds rate is 4%

who controls the money?

the Fed (designed to control inflation)

The federal funds rate target is the most frequently used monetary policy tool.

false

what is the formula for the money multiplier

(1/requied reserve ratio)= (1/R)

describe Da

(asset demand) 1.)money as a store of value 2.)varies inversely with interest rate

how do you calculate required reserves

(checkable deposits)x(reserve ratio)

describe Dt

(transactions demand) -determined by nominal GDP -independent of the interest rate

what are the functions of a commercial bank?

1.) accepting deposits 2.)marking loans

how does the fed earn a profit

1.) making loans to earn interest 2.)buying securities to earn interest

describe the dynamic of a single commercial bank

1.) the fed can establish and vary the reserve ratio within limits set by congress 2.)required reserves help the fed control lending abilities of commercial banks 3.)excess reserves

what are the assumptions of the banking system?

1.)20% required reserves 2.)all banks "loaned up" 3.)banks lend all of their excess reserves 4.)a $100 bill is found and deposited 5.)multiple deposits can be created

how is the demand for money quantified?

1.)Dt 2.)Da 3.)Dm

what is M2?

1.)M1 plus near-monies 2.)savings deposits including money market deposit accounts (MMDA) 3.)small denominated time deposits 4.)money market mutual funds (MMMF)

what makes up the federal reserve balance sheet?

1.)assets 2.)liabilities

what is a balance sheet?

1.)assets=liabilities + net worth 2.)both sides balance

what are the specifics of Fractional Reserve system characteristics?

1.)banks create money through lending 2.)banks are subject to "panics"

what are open market operations?

1.)buying and selling of government securities (or bonds) 2.)commercial banks and the general public 3.)used to influence the money supply

what affects the real GDP and the price level?

1.)cause and effect chain 2.)expansionary monetary policy 3.)restrictive monetary policy

what are institutions offering checkable deposits

1.)commercial banks 2.)savings and loan association 3.)mutual savings banks 4.)credit unions

what are necessary transactions

1.)create a bank 2.)accept deposits 3.)lend excess reserves

what is M1?

1.)currency 2.)checkable deposits

what are some of the main goals of the fed?

1.)earn a profit 2.)maintain liquidity 3.)create banking alternative

what is expansionary monetary policy?

1.)economy faces a recession 2.)lower target for federal funds rate 3.)fed buys securities 4.)expanded money supply 5.)downward pressure on other interest rates

federal reserve independence

1.)established by congress as an independent agency 2.)protects the fed from to take the actions to increase interest rates in order to stem inflation as needed

what are the types of monetary policy?

1.)expansionary 2.)restrictive

describe the relationships between the fed and commercial banks

1.)fed buys bond from comm banks 2.)fed sells bond t comm banks 3.)fed buys $1,000 bond from comm bank 4.)fed buys $1,000 bond from the public

expansionary monetary policy problem: unemployment/recession

1.)fed buys bond, lowers reserve ratio, lowers the discount rate, or increases reserve auctions 2.)excess reserves increase 3.)federal funds rate falls 4.)money supply rises 5.)interest rate falls 6.)investment spending increases 7.)aggregate demand increases 8.)Real GDP rises

If bond prices decrease, then the:

Interest rate increases

Restrictive monetary policy Problem: inflation

1.)fed sells bonds, increases reserve ratio, increases discount rate or decreases reserve auctions 2.)excess reserves decrease 3.)federal funds rate rises 4.)money supply falls 5.)interest rate rises 6.)investment spending decreases 7.)aggregate demand decreases 8.)inflation declines

what are the aspects of the Fractional Reserve system?

1.)goldsmiths 2.)characteristics 3.)balance sheets 4.)necessary transactions

what are some worries about ZIRP, QE and Twist?

1.)government spending crowded out private spending 2.)largest budget deficits by the federal government would lead to huge interest costs 3.)low interest rates punish savers

what "backs" the money supply

1.)guaranteed by government ability to keep value stable 2.)money as debt 3.)why is money valuable 4.)acceptability 5.)legal tender 6.)relative scarcity

describe the recent US monetary policy

1.)highly active in recent decades 2.)responded with quick and innovative actions during the recent financial crisis and the severe recession 3.)critics contend the fed contributed to the crisis by keeping the federal funds rate too low for too long

what is a term auction facility

1.)introduced Dec 2007 2.)banks bid for the right to borrow reserves

interest rates and bond prices

1.)inversely related 2.)bond pays fixed annual interest payment 3.)lower bond price will raise the interest rate

what are federal reserve functions

1.)issue currency 2.)set reserve requirements 3.)lend money to banks 4.)collect checks 5.)act as a fiscal agent for US Government 6.)supervise banks 7.)control money supply

what is reversibility?

1.)making loans creates money 2.)loan repayment destroys money

what is the cause and effect chain?

1.)market for money 2.)investment and interest rate 3.)investment and aggregate demand 4.)real GDP and prices

what are the functions of money?

1.)medium of exchange 2.)unit of account 3.) store of value 4.)money is liquid

describe the banking system

1.)multiple-deposit expansion

what are the tools of monetary policy?

1.)open market operations 2.)**reserve ratio 3.)**discount rate 4.)**term auction facility 5.)****open market operations

what type of alternative is the fed trying to create?

1.)overnight bank loans 2.)federal funds rate

what is restrictive monetary policy?

1.)periods of rising inflation 2.)increases federal funds rate 3.)increases money supply 4.)increases other interest rates

what is an interest rate?

1.)price paid for the use of money 2.)determined by the money supply and money demand 3.)multiple types of IRs

what is the federal funds rate?

1.)rate charged by banks on overnight loans 2.)targeted by federal reserve 3.)FOMC conducts open market operations to achieve the target 4.)demand curve for fed funds 5.)supply curve for fed funds

what does depositing reserves in a federal reserve bank require?

1.)reserves 2.)reserve ratio

what is a liability?

1.)reserves of commercial banks 2.)treasury deposits 3.)federal reserve notes outstanding

what is the taylor rule?

1.)rule of thumb for tracking actual money policy

what is an asset?

1.)securities 2.)loans to commercial banks

describe the fiscal policy after the great recession

1.)slow recovery especially in terms of unemployment 2.)zero interest rate policy 3.)zero lower bound problem 4.)quantitative easing 5.)forward commitment 6.)operation twist

what are the advantages over fiscal policy?

1.)speed and flexibility 2.)isolation from political pressure 3)monetary policy is more subtle than fiscal policy

what are goldsmiths

1.)stored gold and gave a receipt 2.)receipts used a money by public 3.)made loans by issuing receipts

what is the discount rate?

1.)the Fed as lender of last resort 2.)short term loans

when was the reserve ratio last changed?

1992

what is the Fed's target inflation rate?

2%

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should:

4-6

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

A tax increase and an increase in the money supply.

An increase in the money supply is likely to reduce:

Interest rates

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the:

Asset demand for money

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:

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

A newspaper headline reads: "Fed Cuts Federal Funds Rate for Fifth Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Ease monetary policy

Monetary policy is expected to have its greatest impact on:

Ig.

An increase in nominal GDP will:

Increase the transactions demand and the total demand for money

A newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to:

Reduce inflationary pressures in the economy

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

Assuming that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce:

The money supply by potentially $200 million

A consumer holds money to meet spending needs. This would be an example of the:

Transactions demand for money

Lowering the discount rate has the effect of:

Turning required into excess reserves

Lowering the reserve ratio:

Turns required reserves into excess reserves

Federal Reserve Notes in circulation are:

a liability as viewed by the Federal Reserve Banks.

how do you calculate excess reserves?

actual reserves-required reserves

Compared to fiscal policy, monetary policy has a much shorter:

administrative lag

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

The demand for federal funds is

downsloping because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates will encourage borrowing.

A restrictive monetary policy may be frustrated if the investment-demand curve shifts to the left.

false

An expansionary monetary policy is one that reduces the supply of money.

false

The asset demand for money varies inversely with the nominal GDP.

false

how is money used as a store of value?

hold some wealth in money form

It is costly to hold money because:

in doing so, one sacrifices interest income.

Interest paid on reserves held at the Fed:

incentivizes financial institutions to hold more reserves and reduce risky lending.

small losses can drive banks into

insolvency

what stabilizes money's purchasing power

intelligent management of the money supply-monetary policy

know large diagram on last page of notes

know large diagram on last page of notes

what are the complications with the current monetary policy?

lags -recognition and operational lag -cyclical asymmetry -liquidity trap

An increase in the money supply will:

lower interest rates and increase the equilibrium GDP.

the higher the reserve ratio the lower the

money multiplier

when the fed sells securities, what happens to commercial bank reserves

they are reduced

what is Dm

total money demand

A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.

true

what is leverage?

use of borrowed money to magnify profits and losses

target federal funds rate does what?

varies as inflation and real GDP vary

The asset demand for money:

varies inversely with the rate of interest.