Test 2

Question 1

Stated objectives of the Fed

Answer 1

1. growth of output
2. low levels of unemployment
3. stable prices
4. stable financial institutions and markets

Question 2

how many people determines fiscal policy

Answer 2

536 people

Question 3

how many people determine monetary policy

Answer 3

12 people

Question 4

To increases the money supply, the Fed uses

Answer 4

Expansionary Monetary policy

Question 5

To decrease the money supply, the Fed uses

Answer 5

Contractionary Monetary policy

Question 6

What are the four tools of monetary policy by the Fed to change the money supply

Answer 6

1. Required Reserve Ratio (m)
2. Discount Rate Policy
3. Open Market Operations
4. Interest on Reserve Balances

Question 7

If the Fed increases m….

Answer 7

Banks hold more money
less money for loans
Money supply decreases

Question 8

Define discount rate

Answer 8

interest rate the feds charges banks

Question 9

Why do banks borrow from the Fed.

Answer 9

To cover short-term deficiencies in their required reserves

Question 10

Borrowing from the Fed is a ____ not a right

Answer 10

privilege

Question 11

Banks may borrow from other banks that are holding ____

Answer 11

excess reserves

Question 12

If Fed increases discount rate…

Answer 12

costs more to borrow
banks choose to hold more excess reserves
Less money for loans
Money supply decreases

Question 13

Open Market Operations are carried out by the ______

Answer 13

Federal open market committee (FOMC) in New York

Question 14

Open Market operations concerned the Fed buying and selling ____

Answer 14

government securities (T-Bonds) from/to banks

Question 15

If the Fed buys securities from banks/Fed sells securities to banks

Answer 15

Banks have more money
More money for loans
Money supply increases

Question 16

What are interest on reserve balances?

Answer 16

The fed pays interest to banks on all of the banks reserve holdings

Question 17

If Feds decrease the interest on Reserve deposits….

Answer 17

Banks will choose to hold fewer reserves
More money for loans
Money supply increases

Question 18

What causes to shift the money supply curve?

Answer 18

The Fed determines the money supply by using the 4 tools of monetary policy

Question 19

Wealth =

Answer 19

= Money + Interest-Earning Assets (Bonds)

Question 20

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….

Answer 20

less wealth will be held in the form of money

Question 21

At low rates of interest, or interest rates falls, households may choose to more of their wealth in the form of money….

Answer 21

less wealth will be held interest-earning assets (bonds)

Question 22

What shifts the demand for money?

Answer 22

1. Household income
2. The average price of goods

Question 23

Equilibrium in the Money Market
Assume: Fed increases interest on reserves

Answer 23

Banks plan on holding more money
Less money for loans
Money Supply decreases

SM1 <– SM0
m0 decreases to m1
i0 increases to i1