Monetary Policy

Name three financial services the Fed offers.

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How many districts make up the Federal Reserve System?

12

Who created the Federal Reserve System?

Congress

What is the name of the Fed's chief monetary policymaking body?

Federal Open Market Commitee

Who conducts monetary policy?

Federal Reserve (Fed)

The Fed is more independent than any other part of the government. Why?

Independence helps a central bank focus on long-term economic problems. Research shows that countries with more central bank independence tend to be more successful in controlling inflation that other countries.

What happens if the money supply grows too rapidly?

Inflation can occur.

What is inflation? What groups are hurt by inflation?

Inflation is an overall increase in the average price level. People on fixed incomes and people that have saved money are hurt by inflation

What effect does the sale of securities by the Fed have on interest rates?

Interest rates may rise.

What effect does the purchase of securities by the Fed have on interest rates?

Lowers the interest rate that banks charge on very short-term loans.

What is the Fed's most frequently used tool for conducting monetary policy?

Open Market Operation --- the buying and selling of securities

What happens when the Fed buys securities?

Provides the banking system with additional funds to lend

What is real GDP per capita (Examine all three parts: 1) real, 2) GDP, 3) per capita)?

Real means without inflation. GDP stands for gross domestic product, a measure of the size of an economy. Per capita means per person

How does banking supervision differ from banking regulation?

Regulation- defines acceptable behavior (Board of Governors) Supervision- enforcement of rules (Reserve Banks)

Who are the voting members of the FOMC

The Board of Governors and a rotating group of district bank presidents.

Describe the two main part of the Federal Reserve System: the Board of Governors and the district banks

The Board of Governors is the central authority of the Federal Reserve System that meets in Washington, DC. The District Banks are the regional authorities responsible for regulating and supervising member banks

Another tool of monetary policy is the discount rate. How does this work?

The Discount Rate is the interest rate the Fed charges banks on short-term loans. Changes in the discount rate can influence other interest rates.

For the following economic conditions: Identify whether economists should strive to (a) expand or (b) contract the economy. Consumer confidence after 9-11 was low.

A

What can cause inflation? What is hyperinflation?

An increase in the cost of resources or an increase in the demand for goods can cause inflation. Hyperinflation is inflation that is occurring at a very rapid rate.

In which Federal Reserve district do you live?

Atlanta

What happens when the Fed sells securities?

Banks have less to lend, federal fund rate (interest rate) may rise, and some borrowing may be discouraged.

What are the three main tools the Fed has to prevent both recession and inflation?

1. Open Market Operations 2. Reserve Requirements 3. Discount rate

What are the three responsibilities of the Federal Reserve System?

1. Providing financial services 2. conducting Monetary Policies 3. Supervising Banks

Name the three parts of the Federal Reserve System?

1. The Board of Governors 2. The Reserve Banks 3. The Federal Open Market Commitee

What are open market operations?

purchases and sales by the Fed of U.S. government securities; large IOUs of the federal government.

what are the tools of monetary policy?

reserve requirement, discount rate, open market operations, and buying and selling securities

Who choose the members of the Board of Governors?

the U.S. president

What is monetary policy? What is money?

is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and rate of interest.

What is the job of the FOMC? What are open market operations?

The FOMC sets monetary policy. Open market operations are the buying and selling of

Why is the job of making monetary policy described on page 3 as "a balancing act"?

The Fed has to make sure money and credit do not grow too slowly or too rapidly.

What is a recession? How can slow money growth and tight credit lead to a recession?

A recession is a period of at least six months of decreasing real GDP. People will reduce spending if there is less money moving through the economy.

Describe the structure of the Fed.

Board of Governors - consist of seven members, appointed by the President and confirmed by the Senate. 12 Federal Reserve Banks spread around the country. Federal Open Market Committee (FOMC) -

For the following economic conditions: Identify whether economists should strive to (a) expand or (b) contract the economy. Gross private investment in billions was $270 last year, $250 last quarter, and $240 this quarter.

A

For the following economic conditions: Identify whether economists should strive to (a) expand or (b) contract the economy. Last year unemployment was 8%, last quarter 9%, this quarter 10%,

A

For the following economic policies, identify whether the tool used is a (a) fiscal policy tool or (b) monetary policy tool. tax rates rise 10%

A

For the following economic policies, identify whether the tool used is a (a) fiscal policy tool or (b) monetary policy tool. the Navy buys a new ship

A

For the following economic scenarios, identify whether you would use an (a) expansionary (easy) money policy or (b)Contractionary (tight) money policy. Surveys show consumers are losing confidence in the economy, retail sales are weak, and business inventories are increasing rapidly.

A

What services does the Fed provide for the government?

1. The Fed pays out federal income tax refunds by way of a government account at the Fed. 2. The Fed also plays a role in the government's borrowing. a. saving bonds applications are processed at the Fed. 3. The Fed administers the Legacy Treasury Direct accounts - holds electronic securities, debts or IOUs issued by the Fed.

What financial services does the Fed provide for banks and the public?

1. The Fed provides banks with cash to meet their customers' needs 2. Fed stores excess money for banks and credits it to their accounts. 3. Fed counts bills and shreds bills 4. Fed processes about one-third of all checks written in the U.S.

For the following economic scenarios, identify whether you would use an (a) expansionary (easy) money policy or (b)Contractionary (tight) money policy. Unemployment is at 14%

A

For the following economic conditions: Identify whether economists should strive to (a) expand or (b) contract the economy. Last year GDP was $2,897, last quarter, $3,645, this quarter $5,678. CPI last year was 240, last quarter 260, this quarter 275.

B

For the following economic policies, identify whether the tool used is a (a) fiscal policy tool or (b) monetary policy tool. the Fed sells bonds

B

For the following economic policies, identify whether the tool used is a (a) fiscal policy tool or (b) monetary policy tool. the federal funds rate is increased

B

For the following economic policies, identify whether the tool used is a (a) fiscal policy tool or (b) monetary policy tool. the reserve requirement is raised to 12%

B

For the following economic scenarios, identify whether you would use an (a) expansionary (easy) money policy or (b)Contractionary (tight) money policy. Business deals and investment are expanding rapidly and economists believe strong inflation lies ahead.

B

For the following economic scenarios, identify whether you would use an (a) expansionary (easy) money policy or (b)Contractionary (tight) money policy. Inflation is at 15%.

B

Why are Federal Reserve member chosen for 14 years?

Board members have long term lengths to give them independence from political pressure.

What is the solution to the macroeconomic problem of Inflation? for fiscal policy

Contract by increasing taxes and/or decreasing spending

What other tools can the Federal Reserve use to change the money supply? Describe each.

Discount window: interest rate the Federal Reserve charges member banks for overnight loans Reserve requirement: percentage of deposit that member banks must keep in reserve. The rest of a deposit may be then loaned out.

What is the goal of monetary policy?

Easy money policy (increase the equilibrium level of GDP) or tight money policy (decrease the equilibrium level of GDP)

What is the solution to the macroeconomic problems of Recession, Unemployment, Slow Growth in GDP, Depression? for monetary policy

Easy money policy: 1: Decreasing the reserve requirement Tool 2: Lowering the discount rate Tool 3: Buying government securities

What is the solution to the macroeconomic problems of Recession, Unemployment, Slow Growth in GDP, Depression? for fiscal policy

Expand by decreasing taxes or increasing spending

Why do we want the economy to grow?

Increases standard of living for citizens living in a nations; Allows more people to find employment.

Another tool of monetary policy is the reserve requirement. How does this work? Why is it seldom used?

Reserve requirements are the percentages of certain deposits that banks must have either in their own vaults or on deposit at the Fed. Reserve requirements are a powerful tool, because they affect the ability of the banking system to create money. The Fed rarely changes reserve requirements because frequent changes make it hard for bankers to plan. In addition, raising the reserve requirements imposes a kind of tax or cost on banks.

What is the relationship between the Fed and other banks?

The Fed supervises banks in order to make sure they operate safely and soundly, and are sensitive to risks. 1. makes sure banks have enough capital to withstand an economic downturn or unpaid loans. 2. Examines bank operating procedures to make sure they are not susceptible to theft or fraud by employees or others

What is the Federal Funds rate? Who is responsible for executing the FOMC's monetary policy

The Federal Funds rate is the interest rate at which banks charge each other for short-term overnight loans. The trading desk at the New York Federal Reserve Banks

How does a central bank's independence from political pressure affect its success at fighting inflation?

The more independent a central bank is, the more effective it is in carrying on monetary policy.

What is the solution to the macroeconomic problem of Inflation? for monetary policy

Tight money policy: Tool 1: Increasing the reserve requirement Tool 2: Raising the discount rate Tool 3: Selling government securities

What happens if money and credit grow too rapidly? How will this affect people?

Too rapidly = inflation - increase in price level 1. Incomes don't rise as rapidly as prices - reduction in purchasing power. 2. uncertainty and instability in the economy.

What happens if money and credit grow too slowly? How will this affect people?

Too slowly = funds won't be available for loans, businesses and people will find it harder to borrow to make major purchases