AP macro monetary policy

Which of the following is not a function of the Federal Reserve System?

A.It acts as a central bank to the central government.

The Federal Reserve System is made up of twelve regional banks owned by

A.commercial banks in the respective districts that have chosen to be members of the Fed.

Which of the following was NOT one of the Fed's original functions

A.control interest rates

In the short-run, Monetary policy can affect ____ while in the long-run, it affects ______

AD and Output, Inflation

When you hear talk of the government 'printing money' they are referring to the possibility of

B.Fed purchases of newly issued government debt

When the Fed buys bonds in the open market, in the product market (the aggregate demand-aggregate supply model),

B.real GDP and the price level will rise.

Which of the following statements about the structure of the Fed is an advantage from the perspective of conducting monetary policy?

C.The FOMC gets input from Federal Reserve banks throughout the country

Which organization is responsible for managing the nation's money supply?

C.The Federal Open Market Committee (FOMC)

A liquidity trap is said to exist when a change in monetary policy has no effect on

D. interest rates

Discount Rate

-Banks also can borrow reserves from the Federal Reserve Banks at their "discount windows," and the interest rate they must pay on this borrowing is called the discount rate. The total quantity of discount window borrowing tends to be small, because the Fed discourages such borrowing except to meet occasional short-term reserve deficiencies. The discount rate plays a role in monetary policy because, traditionally, changes in the rate may have "announcement effects"-that is, they sometimes signal to markets a significant change in monetary policy. A higher discount rate can be used to indicate a more restrictive policy, while a lower rate may signal a more expansionary policy.-The discount rate is the interest rate that the Fed charges banks to borrow directly from the Fed. The discount rate is usually changed after the fact of a policy decision involving open market operations. If the Fed is using open market operations to carry out an expansionary monetary policy, it may follow up on changes in the Fed funds rate with a change in the discount rate. In this way, changes in the discount rate are used to confirm (to the public) the direction of Fed policy.

Interest Rate Effect

-There is an inverse relationship between bond prices and interest rates. When the bond price goes up, the interest rate goes down. When the bond price goes down, the interest rate goes up.

Fed Structure

12 Branches. Independent. 7 Board of Governor members.

Quantitative Easing

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. This increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Federal Funds Market

A loanable funds market in which banks seeking additional reserves borrow short-term funds (generally for seven days or less) from banks with excess reserves. The interest rate in this market is called the federal funds rate.

Credit Easing

A strategy that involves the extension of central bank lending to influence more broadly the proper functioning of credit markets and to improve liquidity.

If the Fed increases the discount rate, it is pursuing

A. a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy.

In December 2008, the Federal Reserve announced that it would take extraordinary measures to address the financial crisis in the economy. These measures include all of the except

A.buying mortgage-backed securities.

In addition to its traditional policy actions, in the financial crisis and its aftermath, which of the following has the Fed has done?

A.come up with no ways for injecting reserves, credit and liquidity into the banking system

The Federal Reserve does all of the following except

A.make loans to individuals

Studies in the 1980s and early 1990s showed that, in general, greater central bank independence

A.was associated with lower average inflation.

The seven members of the Board of Governors serve 14-year terms to

B. Reduce political influence

The Federal Reserve System was established in 1913 in response to the

B.bank panic of 1907.

The federal funds rate is determined

B.by the supply and demand for bank reserves.

In general, an increase in the Fed's assets will, other things equal, increase

BANK RESERVES. My original answer was interest rates, but that's wrong.

What is monetary policy?

D. The actions a central bank takes to influence the availability and cost of money and credit and expectations.

Contractionary monetary policy by the Fed could include

D.selling government securities in the open market.

Back to Lender of Last Resort - Provider of Liquidity and Even of Capital

Expanded Lending to Banks, other financial institutions

Fed Procedures

FOMC meets every 6 weeks, discusses conditions and issues directive to manager of system open market desk.

The Fed is structured as an agency of the executive branch, with the Chairman of the Fed answering directly to the President.

False

The Fed's exit strategy refers to how they will exit from political discussion

False

Exit Strategy

Fed's plan to shrink their assets and resume normal policy as the economic recovery strengthens, to avoid inflationary pressures.

Depository Institution

Financial institution that obtains its funds mainly through deposits from the public; includes commercial banks, savings and loan associations, savings banks, and credit unions.

The time between recognizing the existence of a problem and adopting a course of action to deal with the problem is called the

Implementation Lag, which is also the shortest time lag for monetary policy.

Pro-Cyclical Policies

Policies that make the ups and downs of the economy worse rather than better. Can be caused by long and variable lags in monetary policy (usually about 6 months to impact)

Liquidity Trap

Situation that exists when a change in monetary policy has no effect on interest rates. A situation in which the nominal interest rate is 0. and there is deflation. In this case the real interest rate is positive and the central bank cannot use conventional monetary policy ( a lower interest rate) to stimulate the economy. B/C the real interest rate is high, firms do not wish to borrow and "liquidity" (money) is "trapped" in financial institutions.Short-Run Interest Rates at or close to 0.

Quantitative easing refers to expansionary monetary policy when the economy is in a liquidity trap

TRUE

The Fed provides forward guidance about future short-run interest rates in order to influence current long-run interest rates

TRUE

Pushing on a String

Teacher's Notes: - related idea that in a depression/recession either the Fed will not be able to get interest rates down because of the liquidity trap, or even if they can, businesses won't wish to invest and thus the Fed will not be able to stimulate the economy.

Exchange Rate Effect

Teacher's Notes: Fed buys bonds, fed funds rate goes down, Money Supply goes down, Exports Up, Imports Down, Demand Up, Price and Y Up.

Wealth Effect

Teacher's Notes: Rates Down, Stock Prices Up, Wealth up, Consumption Down, Demand Up, Price, Y, Up

Liquidity Trap/Zero Lower Bound - ZIRP (zero interest rate policy)

Teacher's Notes: the idea that at very

At the end of 2008, the federal funds rate in the United States was close to zero. Which of the following is a major concern associated with such a low rate?

That traditional monetary policy will have no impact on the economy.

Monetary Policy Objective

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Conventional Monetary Policy

The central bank can expand the money supply to lower interest rates and encourage spending.

Federal Funds Rate

The interest rate at which depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight. It is not (as the name might initially suggest) the rate at which the Fed lends to financial institutions.

Older Demand/Supply for $ Approach

Think of Interest Rates as the "price" of money and so the demand for money curve is downward sloping.

Credit Channels

availability of funds

The _______ rate is the interest rate at which the Fed lends ______ to commercial banks.

discount rate, deposits

A primary function of a central bank is to

set monetary policy.

Unconventional Monetary Policy

unusual forms of central bank lending and unusual types of open-market operations. Quantitative Easing