Chapter 16: Monetary Policy
What two effects, leading to an increased money supply, could a reduced RRR have?
Free up reserves Increase money multiplier
What effect does the Fed's purchase of government bonds have on the money supply?
Increase in money supply
Why does the Fed seldom, if ever, change bank reserve requirements?
It would disrupt the banking system
Which of its monetary policy tools does the Federal Reserve use most often?
Open market operations
How do banks respond to a lowered discount rate?
Reducing excess reserves through loans
What three tools could the Federal Reserve use to adjust the money supply?
Reserve requirements Discount rates Open market operations
How does a raised discount rate affect bank loans and the money supply?
Banks reduce loans to reduce money circulation
Monetarism
Belief that the most important thing it comes to macroeconomic stabilization is the MONEY SUPPLY.
How does the Fed's sale of bonds reduce the money supply?
Bond dealers pay with checks drawn on their own banks
If you deposit $1,000 of borrowed money in a bank checking account, by how much do you increase the money supply?
$1,000
Outside Lag
the time it takes for monetary policy to have an effect.
Inside Lag
delay in implementing monetary policy.
Why does the Federal Reserve establish a required reserve ratio?
To ensure banks will have enough funds to meet withdrawal needs
Easy Money Policy
monetary policy that increases the money.
Tight Money Policy
monetary policy that reduces the money.
