Monetary Policy Test Flashcards
What is the most important and most used tool of the FED?
Open market operations
How does the FED use open market operations with commercial banks?
The FED buys securities from commercial banks and increases the reserves of commercial banks
Or
The FED sells securities to commercial banks and commercial bank reserves are reduced
How does the FED use open market operations with the public?
The FED buys securities from costumers and the CB collects this money and reserves are increased
Or
The FED sells securities to costumers and the FED collects this money from the CB and reserves are reduced
What is the objective of monetary policy?
To assist the economy in achieving a full-employment,non-inflationary level of total output
High price bonds means what for interest rates?
Low interest rates
Low prices bonds means what for interest rates?
High interest rates
What happens when the FED buys security?
It potentially increases the money supply by providing more excess reserves
What happens when the FED sells securities?
It potentially decreases the money supply by taking away excess reserves for money creation
Bond prices and interest rates are related how?
Inversely
What does raising the reserve ratio do?
It’s increases the amount of money required to be withheld from loans, diminished the ability of a bank to make new loans, and requires banks to get new demand deposits or foreclose on loans
What does lowering reserve ratio do?
Decreased the amount of money required to be withheld from loans, increases loaning ability, and banks can now issue more loans
Why does the FED never raise the reserve ratio?
The banks will be forced to foreclose on loans
What does the discount rate allow the FED to do?
It allows the FED to make short term loans to its members
What does raising the discount rate do?
It discourages banks from borrowing and it decreases money creation
What does lowering the discount rate do?
It encourages banks to borrow, it increases excess reserves
When is the easy money policy used?
In recession
What does the FED do to make credit cheap and available during recession?
The FED buys bonds from banks and the public which increases excess reserves so banks can grant more loans
What does the FED do during recession to increase the money supply?
The FED lowers the discount rate and lowers the reserve ratio
Buying bonds from banks and the public is what policy
Easy money
Lowering the discount rate is what policy?
Easy money
Lowering the reserve ratio is what policy?
Easy money
What is the result of lowering discount rate of lowering reserve ratio?
It lowers the interest rate
When is a tight money policy used?
During inflation
What does the Fed do during inflation to restrict credit?
Sells government bonds and this decreases banks excess reserves
What does the fed do during inflation to decrease the money supply?
Raise the reserve ratio, raise the discount rate
What happens when the fed raises the reserve ratio and discount rate?
Raises the interest rate
Fed selling gov bonds is what policy?
Tight money
The fed raising the reserve ratio is what policy
Tight money
The fed raising the discount ratio is what policy?
Tight money
Changes in the reserve ratio are
Rare
What is the most effective tool of the fed?
open market operations
What is the federal funds rate?
Inter-bank overnight lending
Investment demand varies ____ with interests rates?
Inversely
Businesses invest more with _____ interest rates?
Lower
What are the money market, investment demand, and GDP graphs all have in common?
They want to reach full employment
Excess reserves increase
Easy money policy
Money supply rises
Easy money
Interest rates fall
Easy money
Investment spending increases
Easy money
AD increases
Easy money
Real GDP increases
Easy money
Excess reserves decrease
Tight money
Money supply falls
Tight money
Interest rate rises
Tight money
Investment Spending decreases
Tight money’s
AD decreases
Tight money
Inflation decreases
Tight money
The steeper the demand for money curve is the
Greater the effect of any given changes to money supply on interest rate
Increases GDP
Easy money
Decreased GDP
Tight money
Compared to fiscal policy monetary policy works
Quicker
How controlled is monetary policy?
They can’t really keep track of all the transactions that are occurring
Why are easy money policies not guaranteed to work?
You can’t force people to invest just because there are better investment rates
Net exports and fiscal policy work in
Opposite directions
How does easy money affect net exports?
Decreases foreign demand for dollars, dollar depreciates, net exports increase, AD increases
How does tight money policy affect net exports?
Increases foreign demand for dollars, the dollar appreciates, net exports decrease, AD decreases
What policy changes by the FED reinforces each other to achieve economic growth?
Buying gov securities and lowering the discount rate
What policy changes offset one another?
Buying gov securities and raising discount rate
What tool relies on bank borrowing to be effective?
Discount rate
What combination of gov policies are most likely to reduce the inflation rate?
Sell gov securities and decrease gov spending
What combo of policies is least likely to reduce the inflation rate?
Burning gov securities and decreasing taxes
If the fed raises discount rate it is trying to
Reduce inflationary pressures
If the fed is trying make interests rates go down it wants
Unemployment to decrease
What policy increases GDP?
Lowering the federal funds rate
When the FED tightens money it is trying to reduce
The inflation rate
