Econ Test 3 - Tools of Monetary Policy Flashcards
(154 cards)
Affects the quantity of reserves and the monetary base
Open market operations
The primary tool of monetary policy?
Open market operations
The federal funds rate is determined in the market for ____?
reserves
The federal funds rate is strongly influenced by what?
the fed’s open market operations
What is the primary target of monetary policy in contemporary periods?
the federal funds rate
What is the primary credit tool of the monetary policy?
Discount Loans
What does discount loans change?
borrowed reserves BR
What kind of borrowing occurs in Discount Loans?
banks borrowing directly from the Fed
What primarily reflects the Fed’s role as the lender of last resort to the banking system?
Discount Loans
Who is the lender of last resort to the banking system?
The Fed’s
Does discount loans affect monetary base?
Yes
The reserve requirement is changed at whose discretion?
The Fed’s with statutory limits
What isn’t really used as a monetary policy tool since the early years, but still affects the money multiplier?
Reserve Requirement
The fourth tool that was recently added to the Monetary Tools
Interest paid on RR and ER balances
Quantity of reserves demanded =
Required reserves + quantity of excess reserves demanded
RR + ER
What are insurance against deposit outflows?
Excess reserves
What is the cost of holding excess reserves?
The interest rate that could have been earned by ledning them out minus the interest rate that is paid on these reserves by the Fed
The higher the federal funds rate is above the rate paid on excess reserves the higher/lower the opportunity cost of holding excess reserves
higher
The lower the federal funds rate is above the rate paid on excess reserves, the higher/lower the opportunity cost of holding excess reservers
lower
The quantity of reserves demanded is neg/pos related ot the federal funds interest rate
negatively
When is there no opportunity cost to holding excess reserves?
If the federal funds rate tries to fall below the excess reserves rate
If the federal funds rate equals the excess reserves rate, what happens to reserves demanded (R^d)
becomes infinitely elastic (flat)
When did the Fed start paying interest on reserves, both required and excess?
October 2008
What is the targe range for effective federal funds rate?
0 to 1/4 percent