The Fed. Flashcards
What was Alan Greenspan meaning when he said that Caution seems warranted?
- He was warning of economy collapse.
Name six historical events that showed the power of Alan Greenspan.
Saved the world a couple of times, cost George Bush I his reelection, He made our wealth to greatly increase by making the markets soar for a time, He sent tremors through the Global Economy when he used the Phrase “ irrational exuberance” to describe an unstable stock market, he also caused a recession, and crashed the market in 2001.
How powerful was Alan Greenspan?
He could make or break fortunes and economies with a word.
What was “the briefcase index”?
A humorous attempt at predicting his actions based upon the thickness of his briefcase.
What impact could the actions of Alan Greenspan as Federal Reserve Chairman make on the world?
He could kill entire national economies with a word.
What is the term “the Fed” short for?
The Federal Reserve Board
What was the Fed created for?
To be the central bank of the USA
When was the Fed created?
1913
What is the Fed’s supposed duty?
To preserve and protect a flexible but stable economy.
What are the two powers of the Fed?
It has power over the nation’s currency and conducts the nation’s monetary policy.
What is “the money supply”?
The amount of money in the system is known as the money supply.
Besides controlling the money supply, what else does the Fed do?
It is to protect a flexible, stable economy.
- What did the Full Employment and Balanced Growth Act instruct the Fed to do? When was this enacted? (4 pts)
- Seek stable prices, maximize sustainable growth, maximize employment.
What axiom does Economics traditionally hold to?
Growth is good, too much growth is bad.
When an economy grows too fact, what does it inevitably lead to?
Inflation.
What is inflation?
the rising prices as the result of too much money chasing too few goods.
Why is too much job growth not good?
It leads to inflation.
Why is a certain amount of unemployment necessary and even good?
It limits rising labor costs
and dampens consumer demand, helping to keep prices in check.
Before the economic boom of the mid-1990’s what did economic orthodoxy say?
That unemployment could not fall below six percent without provoking dangerous inflation levels.
What two key questions did the Fed have to wrestle with in setting its policies?
What is sustainable growth, what is maximum employment?
What impacts do Fed policies have upon America?
Cost of loans, profits, the stock market, who is president.
What does the Federal Reserve System consist of?
The board of governors, The twelve federal reserve banks.
How many governors of the Fed are there and how are they made?
Seven. They are nominated by the president, confirmed by the Senate.
How long is the term of the governors?
Fourteen years.
Why are the terms of governors so long?
So that changing politics don’t affect them as much.
How are the chairman and vice-chairman of the Fed nominated?
They are nominated by the president, confirmed by the Senate.
Name the 12 Federal Reserve Banks. Note: You will find the name of one of these banks on every dollar bill in your wallet.
Atlanta, Boston, Chicago, Cleveland, Dallas, Minneapolis, Kansas City, New York, Philadelphia, Richmond, St. Louis, and San Francisco.
What are the four responsibilities of the twelve reserve banks?
Oversee the banking industry, regulate currency in production, clear the majority of paper checks, facilitate wire transfers.
What does the Board of Governors of the Fed do?
Controls discount rate.
What is a bond?
A bond is a note or obligation requiring the borrower—usually a government or corporation—to pay the lender—an individual or institutional investor—the amount of the loan (“face value”) at the end of a fixed period of time.
What chief way that governments and businesses raise cash to stay in business?
Bonds
Where do government and corporate bonds trade at?
An open bond market.
What direction do bond prices move?
In the opposite direction of interest rates
What are T-Bills
Securities with maturities ranging from thirteen weeks to one year.
What are all three Treasury securities collectively called?
Bonds.
What advantage do Treasury securities have over corporate bonds?
Less risk
What advantage do corporate bonds have over government bonds?
Greater returns.
What are the riskiest bonds called? What are their two characteristics?
Junk Bonds. Lowest credit quality, Highest potential returns.
What is a deficit?
The amount more that the government spends than it makes.
What makes up the national debt?
Accumulated deficits.
What do large deficits tend to lead to?
Higher interest rates. The government competes with its constituents for capital.
