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Econ The Fed
Midyear Prep
| Question | Answer |
|---|---|
| Federal Reserve System (Fed) | A bank for banks |
| run on a bank | when people are worried that banks will run out of money, multiple people will take money out at once, thus the bank will run out of money, causing a bank run |
| purpose of the Fed | 1. Regulates the banking system 2. Manages price level/inflation 3. Encourage growth |
| discount rate | interest that banks have to pay the fed when they take a loan out from the fed |
| monetary policy | Fed messes with interest rates/increases or decreases interest rates to either reduce inflation or increase growth |
| reserve ratio | the percentage of deposits that the bank is required to keep |
| ample reserves | banks have vast reserves: changing the money supply does nothing. |
| interest on reserves | the fed pays bank interest for keeping their money at the fed. |
| When reserves were limited, how did the Fed control the nation’s money supply? | Open market operations =>fed buys bonds, sends $ into banks, MS+ IR- (boosts growth but may cause inflation); fed sells bonds, removes $ from banks, MS- IR+ (reduces inflation may cause recession) |
| In today’s ample reserves environment, how does the Fed control interest rates? | When the fed changes the interest on reserves, it will move the fed's fund rate and other interest rates across the economy follow. increase in IoR decreases inflation (may cause recession), decrease in IoR boosts the economy (may cause inflation) |
| How does monetary policy work? | Historically, w/ open market operations and discount rate, but today w/ interest on reserves |
Created by:
undercoverkookie68
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