Chapter 14,15 - Monetary Policy And Economic Growth

Question 1

What is the federal reserve system and what is their responsibility?

Answer 1

The federal reserve system is the central banking system of the United States. Their central responsibility is MONETARY POLICY

Question 2

What is monetary policy?

Answer 2

The use of money and credit controls to influence macroeconomic activity

Question 3

Determinants of the macro economy:

Answer 3

Policy levers - fiscal policy (gov spending and taxes to shift AD curve) and monetary policy (shifts AD curve using money and credit control)

Question 4

3 outcomes of the macro economy:

Answer 4

Output (Real GDP)
Jobs (unemployment rate)
Prices (inflation, deflation, relative price change)

Question 5

The federal reserve banks perform many critical systems. Name 4 of them

Answer 5

1. Clearing checks between private banks
2. Holding bank reserves
3. Providing currency
4. Providing loans (discounting)

Question 6

Who holds onto most of the required reserves of private banks?

Answer 6

The fed

Question 7

Explain the term “discounting”

Answer 7

Term for the fed providing loans to private banks. The interest rate the fed charges to the private banks is called DISCOUNTING

Question 8

Through what 2 tools does the fed have the power to alter the money (m1) supply?

Answer 8

1. Reserve requirements
2. Discount rate

Question 9

Explain how the fed can alter the money supply through reserve requirements

Answer 9

By changing the reserve requirement, the fed can directly impact the lending capacity of the banking system (excess reserves)

Question 10

A decrease in required reserves directly increases…..

Answer 10

Excess reserves

Question 11

When excess reserves go up, explain what this effect has on AD

Answer 11

When excess reserves go up, total lending capacity goes up, C goes up, which causes AD to go up and the AD curve will shift to the right

Question 12

The ability of a banking system to make additional loans is determined by….

Answer 12

Excess reserves and the money multiplier

Question 13

When multiplier goes up, what happens to the lending capacity?

Answer 13

It goes up

Question 14

What is the formula for multiplier

Answer 14

Multiplier = 1/req reserve ratio

Question 15

When required reserves goes down, explain the chain of reactions that leads to a change in the lending capacity

Answer 15

When req reserves goes down, excess reserves goes up, money multiplier goes up, and thus the lending capacity goes up

Question 16

What is the discount rate?

Answer 16

The rate of interest charged by the federal reserve bank for LENDING RESERVES to private banks

Question 17

Sometimes, bank reserves run low and they must……

Answer 17

Replenish their reserves temporarily

Question 18

What is the source for last minute extra reserves for private banks?

Answer 18

-discounting (fed sets rate)

Question 19

What are the 2 levers of monetary policy?

Answer 19

-discount rates
-reserve requirements

Question 20

When the fed sets the discount rate very high, what will the private banks do?

Answer 20

This will cause the banks to hold onto more reserves in the FORM OF REQUIRED RESERVES, which will cause excess reserves to go down, lending capacity to go down, c to go down, and ultimately for AD to go down

Question 21

The ultimate goal of all macro policy is to…..

Answer 21

Stabilize the economy at its full employment potential

Question 22

Monetary policy may be used to….

Answer 22

Shift aggregate demand

Question 23

When the problem is unemployment, what is the solution and the tools THE FED can use to achieve that solution

Answer 23

Unemployment - solution is to shift AD curve to the right (increase) Fed can lower the discount rate or reduce the reserve requirement

Question 24

When the fed sets an extremely low discount rate, what will this cause private banks to do?

Answer 24

This may cause private banks to purposely go under and borrow more because they know they can afford it

Question 25

Economic growth refers to…

Answer 25

Increases in the output of goods and services (real GDP)
Expansion of production possibilities curve

Question 26

Improvements in output may be the result of which 2 things?

Answer 26

-Increased use of existing capacity
Or..
-increases in that capacity itself

Question 27

Economic growth is a ____ process year to year

Answer 27

Cumulative

Question 28

This cumulative process of economic growth is called a _____ process

Answer 28

Exponential

Question 29

What are 4 sources of productivity gains?

Answer 29

-higher skills
-more capital
-improved management
-technological advances

Question 30

Why does more capital result in productivity gain?

Answer 30

Gives the average worker more and better tools to work with

Question 31

Name 3 categories under technological advances

Answer 31

-scientific research
-product development
-innovations in production technique

Question 32

Of the 4 sources of productivity gains, which seems to be the most prominent?

Answer 32

Technological advances