Ch14 - Federal Reserve/Monetary Policy Flashcards
Define monetary policy.
The manipulation of the money supply.
What is the Federal Reserve?
The central bank of the U.S.
What are the 5 main jobs of the Fed?
- Conduct monetary policy
- Lender of last resort to banks.
- Issue currency
- Provide banking services to the govt
- Supervise and regulate the financial institutions.
How many Federal Reserve Banks are there?
12
Who controls the Fed?
Board of Governors (7 members) headed by a president elected Chairman.
What is the Federal Open market Committee?
12 person (fed reserve bank pres mixed with Fed reserve board of Govs) committee responsible for Monetary Policy.
What is the formula for the Deposit Expansion Multiplier?
1/reserve ratio
What are “Required Reserves”?
The amount the Fed requires banks to maintain on hand. Bank vault cash + deposits at federal reserve.
What are excess reserves?
Any amount the bank has beyond it’s reserves.
How does the money supply increase?
Deposit expansion multiplier from bank loaning excess reserves.
What are the 2 primary factors in reducing the DEM?
- Currency drains (payments made limit excess reserves)
- Bank behavior (agressive or conservative)
.
What are the 3 primary tools for monetary policy?
- Open Market operations (buying and selling govt debt)
- Discount and Federal funds rate (adjusting the rate for bank borrowing)
- Adjusting required reserve req’s.
What new Monetary policy tool was introduced in 2008 after the crisis?
Interest paid on reserve deposits.
In open market operations, how does the Fed increase the money supply?
By buying govt debt from banks, which results in an increase in excess reserves (used for lending).
In Open Market Operations, how does the fed decrease the money supply?
Fed sells govt debt to banks at a low rate to decrease reserves for lending.
How does the Fed use Fed Funds and Discount Rates to increase the money supply?
The Fed will lower target fund rates to increase more liquidity.
How does the Fed use Fed Funds and Discount Rates to decrease the money supply?
Fed will raise target Fed Fund rates and decrease liquidity for banks.
What is “Easy Money policy”
Increasing money supply.
What is “Tight money” policy?
Decreasing money supply.
What is the advantage of monetary policy?
Speed and flexibility and the lack of political pressure.
What is the disadvantages of monetary policy?
Recognition and impact lags, and velocity changes.
What were the three main causes behind the housing bubble?
- Low interest rates
- New mortgage instruments with deregulation
- Subprime market.
With a given demand for money, what will happen to interest rates when the money supply increases?
Interest rates will drop
With a given demand for money, what will happen to interest rates when the money supply decreases?
Interest rates will rise.
Lower interest rates will do what to investment and consumption?
Lower interest will raise investment and consumption.
Rising interest rates will do what to investment and consumption?
Rising interest will decrease investment and consumption.
Increasing investment and consumption will change the AD curve by…
AD curve will move right, and GDP and price level will increase.
Decreasing investment and consumption will change the AD curve by…
Moving the AD curve left and lower GDP and Price level.
ID the monetary policy:
MS⬆, i⬇,I and C⬆, AD⬆,GDP⬆
Easy Money
ID the monetary policy:
MS⬇, i⬆,I and C⬇, AD⬇,GDP⬇
Tight money.
What were the 3 root causes of ‘08 financial crisis?
- Housing market collapse
- Lending freeze
- Wall Street crisis spreads (consumption falls, unemployment rises)
What was the TARP (toxic asset relief plan)?
Treasury spent $700B to buy toxic assets and bought stock in those companies.
How did the treasury help reduce foreclosures?
Spent $275B to change loan terms for easier refinancing. Gave money to Fannie/Freddy to buy mortgages.
