Monetary Policy in Practice

Question 1

dual mandate of Fed

Answer 1

1. Keep inflation low (below 2%)
2. Maximize employment (low unemployment)

Question 2

additional goals of the fed

Answer 2

1. help maintain financial stability
2. supervise/regulate financial institutions
3. managing payment system
4. promoting consumer protection

Question 3

Targets of the fed

Answer 3

price of gold in dollars (1920s)

money growth rate (1970s)

Federal funds rate (1980s-present)

Question 4

Federal funds rate

Answer 4

overnight interest rate

Question 5

Tools of the Fed

Answer 5

1. Reserve requirements
2. Discount rate
3. Open market operations

Question 6

reserve requirements for banks

Answer 6

% of revenue that banks have to hold in the fed or in vaults

Question 7

discount rate

Answer 7

the interest rate at which the Fed lends to other banks (overnight)

Question 8

Open market operations

Answer 8

purchases or sales of Treasury securities by Fed

Question 9

ways to lower the Fed funds rate

Answer 9

1. buy Treasury securities from banks
2. raise Fed. interest rates

Question 10

ways in which real interest rates impact the economy

Answer 10

altering borrowing costs

altering value of asset prices

altering the value of the dollar