Monetary Policy

Question 1

Monetary Policy definition

Answer 1

policy and means by which the Federal Reserve controls the money supply and influences interest rates.

Question 2

Federal Reserve Goals

Answer 2

• Maintain long-term economic growth.
• Maintain price levels supported by the economy.
• Maintain full employment.

Question 3

Meaning of easing monetary policy

Answer 3

increasing money supply and decreasing interest rates

Question 4

Tighten Monetary Policy

Answer 4

decreasing money supply and increasing interest rates.)

Question 5

List the tools the fed has to control and influence money supply and interest rates

Answer 5

Reserve Requirement
Discount Rate
Open Market Operations
Excess Reserve Rate

Question 6

What is the reserve requirement

Answer 6

the % of deposits that a bank is to keep in cash

Question 7

Affects of the Fed increasing the reserve requirement

Answer 7

Less cash to lend - Money supply decreases and IR increase

Question 8

What is the Discount Rate

Answer 8

Overnight interest rate that member banks borrow from the Fed

Question 9

Affects of Fed Increasing discount rate

Answer 9

Short term IR increase and Money supply decrease

Question 10

what is the Fed Funds Rate

Answer 10

The rate at which member banks lend to each other.

This is different than the discount rate which is the rate that the fed lends to member banks

Question 11

What is Open Market Operations

Answer 11

Fed buys or sells US gov securities

Question 12

What happens if the Fed starts to Buy Gov securities

Answer 12

Money supply increases and Interest Rate decrease

This is because the Fed is purchasing these from people and therefore putting more $ into the economy

Question 13

what is Excess Reserves

Answer 13

Money that a bank holds at the Fed (Central bank) in excess of required reserve amount

Question 14

Affects of Fed increasing excess reserves

Answer 14

Money supply decrease and IR increase

This is because there is less money being able to lend bc the fed is requiring it to be held in the Central bank

Question 15

what are the possible actions will the fed make in a contraction (tightening) policy

Answer 15

• Increase reserve requirement
• Increase discount rate
• sell gov securities
• increase excess reserve rate

Question 16

What is Fiscal Policy

Answer 16

means by which Congress controls spending and taxation, which influences the money supply and interest rates

Question 17

What are the ways that congress can influence the money supply and interest rates

Answer 17

Taxation
Spending
Debt Management

Question 18

Affects of congress increasing taxes

Answer 18

Money Supply decreases and IR increases

Question 19

Affects of Congress Decreasing spending

Answer 19

Money suplly decreases and IR increases

Question 20

What is debt management - Fiscal Policy

Answer 20

Congress spends more than tax revenues that are collected.

Question 21

What are the affects of congress increasing deficit

Answer 21

Money supply decreases and IR increases

This is because if a deficit occurs the congress must borrow, leading to less money be available for lending, thus decreasing the money supply