Ch14 - Federal Reserve/Monetary Policy

Question 0

Define monetary policy.

Answer 0

The manipulation of the money supply.

Question 1

What is the Federal Reserve?

Answer 1

The central bank of the U.S.

Question 2

What are the 5 main jobs of the Fed?

Answer 2

1. Conduct monetary policy
2. Lender of last resort to banks.
3. Issue currency
4. Provide banking services to the govt
5. Supervise and regulate the financial institutions.

Question 3

How many Federal Reserve Banks are there?

Answer 3

12

Question 4

Who controls the Fed?

Answer 4

Board of Governors (7 members) headed by a president elected Chairman.

Question 5

What is the Federal Open market Committee?

Answer 5

12 person (fed reserve bank pres mixed with Fed reserve board of Govs) committee responsible for Monetary Policy.

Question 6

What is the formula for the Deposit Expansion Multiplier?

Answer 6

1/reserve ratio

Question 7

What are “Required Reserves”?

Answer 7

The amount the Fed requires banks to maintain on hand. Bank vault cash + deposits at federal reserve.

Question 8

What are excess reserves?

Answer 8

Any amount the bank has beyond it’s reserves.

Question 9

How does the money supply increase?

Answer 9

Deposit expansion multiplier from bank loaning excess reserves.

Question 10

What are the 2 primary factors in reducing the DEM?

Answer 10

1. Currency drains (payments made limit excess reserves)
2. Bank behavior (agressive or conservative)
   .

Question 11

What are the 3 primary tools for monetary policy?

Answer 11

1. Open Market operations (buying and selling govt debt)
2. Discount and Federal funds rate (adjusting the rate for bank borrowing)
3. Adjusting required reserve req’s.

Question 12

What new Monetary policy tool was introduced in 2008 after the crisis?

Answer 12

Interest paid on reserve deposits.

Question 13

In open market operations, how does the Fed increase the money supply?

Answer 13

By buying govt debt from banks, which results in an increase in excess reserves (used for lending).

Question 14

In Open Market Operations, how does the fed decrease the money supply?

Answer 14

Fed sells govt debt to banks at a low rate to decrease reserves for lending.

Question 15

How does the Fed use Fed Funds and Discount Rates to increase the money supply?

Answer 15

The Fed will lower target fund rates to increase more liquidity.

Question 16

How does the Fed use Fed Funds and Discount Rates to decrease the money supply?

Answer 16

Fed will raise target Fed Fund rates and decrease liquidity for banks.

Question 17

What is “Easy Money policy”

Answer 17

Increasing money supply.

Question 18

What is “Tight money” policy?

Answer 18

Decreasing money supply.

Question 19

What is the advantage of monetary policy?

Answer 19

Speed and flexibility and the lack of political pressure.

Question 20

What is the disadvantages of monetary policy?

Answer 20

Recognition and impact lags, and velocity changes.

Question 21

What were the three main causes behind the housing bubble?

Answer 21

1. Low interest rates
2. New mortgage instruments with deregulation
3. Subprime market.

Question 22

With a given demand for money, what will happen to interest rates when the money supply increases?

Answer 22

Interest rates will drop

Question 23

With a given demand for money, what will happen to interest rates when the money supply decreases?

Answer 23

Interest rates will rise.

Question 24

Lower interest rates will do what to investment and consumption?

Answer 24

Lower interest will raise investment and consumption.

Question 25

Rising interest rates will do what to investment and consumption?

Answer 25

Rising interest will decrease investment and consumption.

Question 26

Increasing investment and consumption will change the AD curve by…

Answer 26

AD curve will move right, and GDP and price level will increase.

Question 27

Decreasing investment and consumption will change the AD curve by…

Answer 27

Moving the AD curve left and lower GDP and Price level.

Question 28

ID the monetary policy:

MS⬆, i⬇,I and C⬆, AD⬆,GDP⬆

Answer 28

Easy Money

Question 29

ID the monetary policy:

MS⬇, i⬆,I and C⬇, AD⬇,GDP⬇

Answer 29

Tight money.

Question 30

What were the 3 root causes of ‘08 financial crisis?

Answer 30

1. Housing market collapse
2. Lending freeze
3. Wall Street crisis spreads (consumption falls, unemployment rises)

Question 31

What was the TARP (toxic asset relief plan)?

Answer 31

Treasury spent $700B to buy toxic assets and bought stock in those companies.

Question 32

How did the treasury help reduce foreclosures?

Answer 32

Spent $275B to change loan terms for easier refinancing. Gave money to Fannie/Freddy to buy mortgages.