Test 2 Flashcards
Stated objectives of the Fed
- growth of output
- low levels of unemployment
- stable prices
- stable financial institutions and markets
how many people determines fiscal policy
536 people
how many people determine monetary policy
12 people
To increases the money supply, the Fed uses
Expansionary Monetary policy
To decrease the money supply, the Fed uses
Contractionary Monetary policy
What are the four tools of monetary policy by the Fed to change the money supply
- Required Reserve Ratio (m)
- Discount Rate Policy
- Open Market Operations
- Interest on Reserve Balances
If the Fed increases m….
Banks hold more money
less money for loans
Money supply decreases
Define discount rate
interest rate the feds charges banks
Why do banks borrow from the Fed.
To cover short-term deficiencies in their required reserves
Borrowing from the Fed is a ____ not a right
privilege
Banks may borrow from other banks that are holding ____
excess reserves
If Fed increases discount rate…
costs more to borrow
banks choose to hold more excess reserves
Less money for loans
Money supply decreases
Open Market Operations are carried out by the ______
Federal open market committee (FOMC) in New York
Open Market operations concerned the Fed buying and selling ____
government securities (T-Bonds) from/to banks
If the Fed buys securities from banks/Fed sells securities to banks
Banks have more money
More money for loans
Money supply increases
What are interest on reserve balances?
The fed pays interest to banks on all of the banks reserve holdings
If Feds decrease the interest on Reserve deposits….
Banks will choose to hold fewer reserves
More money for loans
Money supply increases
What causes to shift the money supply curve?
The Fed determines the money supply by using the 4 tools of monetary policy
Wealth =
= Money + Interest-Earning Assets (Bonds)
At high rates of interest, or as interest rates increase, households may choose to more of their wealth in the form of interest-earning assets….
less wealth will be held in the form of money
At low rates of interest, or interest rates falls, households may choose to more of their wealth in the form of money….
less wealth will be held interest-earning assets (bonds)
What shifts the demand for money?
- Household income
- The average price of goods
Equilibrium in the Money Market
Assume: Fed increases interest on reserves
Banks plan on holding more money
Less money for loans
Money Supply decreases
SM1 <– SM0
m0 decreases to m1
i0 increases to i1
