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Econ Chapter 16
The Federal Reserve and Monetary Policy
| Question | Answer |
|---|---|
| Created a central bank for the US, far-reaching effort to stabilize the american financial system | Federal Reserve Act in 1913 |
| A nations main monetary authority, able to conduct certain monetary practices | Central bank (reserve banks) |
| Means "relating to money" | Monetary |
| The central banks of the US and is commonly called the fed, independent organizations within the government, which has both public and private characteristics | Federal Reserve System |
| Three common duties all central banks perform/duties of federal reserve | Holding reserves, assuring stability of the banking and monetary systems, and lending money to banks and the government |
| Allowed congress to create the first national banks in the US that could fulfill the duties of a central bank | Federal Reserve Act of 1913 |
| Coins and paper money | Currency |
| A board of seven appointed members who supervise the operations of the Fed and set policy | Board of Governors |
| Held position as chairman of board of governors for 20 years | Alan Greenspan |
| Savings and loan institutions, savings banks, or other institutions that serve savers | Thrift institutions |
| Services the Fed offers in the banking system | Check clearing, lending money, regulating and supervising banks |
| Functions of the Federal Reserve | Serving the banking system, serving the federal government, creating money |
| A service offered by the Fed to record receipts and expenditures of bank clients | Check clearing |
| A company that owns, or has a controlling interest in, more than one bank | Bank Holding Company |
| Audits of the banks financial practices | Bank exams |
| Services the fed offers in the federal government | Paying government bills, selling government securities, distributing currency |
| prints Federal Reserve notes | The Department of the Treasury's Bureau of Engraving and Printing |
| The fraction of the bank's deposits that must be kept in reserve by the bank | Required Reserve Ration (RRR) |
| A mathematical formula that tells how much the money supply will increase after an initial cash deposit in a bank | Deposit multiplier formula |
| Factors affecting demand for money | Cash on hand, interest rates, cost of consumer goods and services, level of income |
| Two major indicators of the money supply | M1 and M2 |
| Includes cash and checkable deposits, also called transactions money | M1 |
| The Fed's monetary tools (managing the supply of money) | Open market operations, adjusting the reserve requirement, adjusting the discount rate |
| Involves Federal Reserve actions that change the money supply in order to influence the economy | Monetary policy |
| The sales and purchase of marketable federal government securities | Open market operations |
| When the fed wants to expand money supply | Buys government securities |
| When the fed wants to contract money supply | Sells government bonds on the open market |
| The interest rate at which a depository institution lends immediately available funds (Balances at the federal reserve) to another depository institution overnight | Federal funds rate (FFR) |
| When the fed lowers the target for FFR | it buys bonds |
| When the fed raises the FFR target | It sells bonds |
| Increaing the RRR can ____ the money supply | Reduce |
| Decreasing the RRR can (((( the money supply | Expand |
| The interest rate that the Fed charges when it lends money to other banks | Discount rate |
| How the discount rate affects the money supply | Sets the reserves that banks have available to lend |
| What happens when the fed increases the discount rate | Banks tend to borrow less from the Fed and have less to lend |
| The interest rate that banks charge their best customers | Prime rate |
| Approaches to monetary policy | Expansionary policy, contractionary policy |
| Purpose of monetary policy | Curb inflation and reduce economic stagnation or recession |
| A plan to increase the amount of money in circulation | Expansionary monetary policy/easy money policy |
| A plan to reduce the amount of money in circulation | Contractionary monetary policy/tight money policy |
| A theory that holds that rapid changes in the money supply cause economic instability | Monetarism |
| Policies to control inflation | Contractionary monetary nd fiscal policy, wage and price controls |
| Government limits on increases in wages and proces | Wage and price controls |
Created by:
AliRutherford