Monetary 101 Flashcards
What is the primary goal of the Federal Reserve’s monetary policy?
To promote maximum employment, stable prices, and moderate long-term interest rates.
True or False: The Federal Reserve can directly control interest rates.
False.
Fill in the blank: The primary tool used by the Fed to influence monetary policy is __________.
open market operations.
What are open market operations?
The buying and selling of government securities in the open market to influence money supply.
What does the term ‘federal funds rate’ refer to?
The interest rate at which banks lend reserve balances to other depository institutions overnight.
Which of the following is NOT a tool of the Federal Reserve? A) Discount Rate B) Open Market Operations C) Taxation D) Reserve Requirements
C) Taxation.
Short answer: What is the discount rate?
The interest rate charged by the Federal Reserve to commercial banks for short-term loans.
True or False: Lowering the reserve requirement allows banks to lend more money.
True.
What is quantitative easing?
A non-traditional monetary policy used by the Fed to stimulate the economy by buying long-term securities.
Fill in the blank: The Fed’s monetary policy can be categorized as __________ or __________.
expansionary; contractionary.
What does contractionary monetary policy aim to do?
To reduce inflation and slow down an overheating economy.
What is the purpose of the Federal Open Market Committee (FOMC)?
To oversee open market operations and set monetary policy direction.
True or False: The FOMC meets eight times a year to assess economic conditions and set policy.
True.
What is inflation targeting?
A monetary policy strategy where the central bank aims to keep inflation at a specified level.
What does ‘tightening’ monetary policy mean?
Increasing interest rates to reduce money supply.
Short answer: What is the primary effect of expansionary monetary policy?
To increase economic activity by lowering interest rates and increasing money supply.
Which economic indicators does the Fed consider when making monetary policy decisions?
Indicators like unemployment rates, inflation rates, and GDP growth.
Fill in the blank: The Federal Reserve was established in __________.
1913.
What is the dual mandate of the Federal Reserve?
To promote maximum employment and stable prices.
True or False: The Federal Reserve operates independently from the federal government.
True.
What is the significance of the Taylor Rule?
It provides a formula for how central banks should adjust interest rates in response to changes in economic conditions.
What is a liquidity trap?
A situation where low interest rates fail to stimulate economic activity.
Short answer: What is the role of the Board of Governors in the Federal Reserve System?
To oversee the Federal Reserve Banks and implement monetary policy.
Fill in the blank: The Federal Reserve’s balance sheet expanded significantly during the __________ financial crisis.
2008.
