When congress established the federal reserve in 1913 its main responsibility was
To make discount loans to banks suffering from large withdrawals by depositors
Congress broadened the feds responsibility since
The 1930s as a result of the great depression
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality
The fed is said to have a dual mandate because
Maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the employment act of 1946
What is a banking panic?
A situation in which many banks experience runs at the same time
Which of the following best explains how the federal reserve acts to help prevent banking panics?
The fed acts as a lender of last resort, making loans to banks , preventing bank panics
'Maximum sustainable employment' means the economy is producing at its potential where
Unemployment includes frictional and structural unemployment
Price stability means
A low and stable inflation rate
Monetary policy is defined as:
The actions the federal reserve takes to manage the money supply and interest rates
Which of the following is not a monetary policy goal of the federal reserve bank?
Low prices
What is nit true regarding the multiole goals of the fed
The goal of financial market stability means that the fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money
One of the goals of the federal reserve is price stabilty. For the fed to achieve this goal,
The rate of inflation shpuld be low, such as 1% or 3%, and should be fairly consistent
Which of the following is a monetary policy target used by the fed
Interest rate
The fed uses policy targets of interest rate and/or money supply because
It can affect the interest rate and the money supply directly and these in turn can affect unemployment, gdp growth, and the price level
What do economists mean by the demand for money?
It is the amount of money - currency and checking account deposits- that individuals hold
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets
What is the disadvantages of holding money?
Monry, in the form of currency or checkinf account deposits, earns either no interest or a very low rate of interest
The federal funds rate is
Thr interest rate that banks chargr each other for overnight loans
The federal funds rate is
Very important for the feds monetary policy because the fed uses the federal funds rate as a monetary policy target since it can control the rate through open market relations
target interest rate in a wallstreet journal article as also known as the
the federal funds rate
who borrows money and who lends money at this target interest reate
banks borrow and banks lend
what is the discount rate
the discount rate is the rate at which the fed lends to banks
what is the relationship between the federal funds falling and the money supply increasing
to decrease the federal funds rate, the fed must increase the money supply
how does lowering the target for the federal funds rate "pour money" into the banking system?
to increase the money supply, the fed buys bonds on the open market, which increases bank reserves
when the federal reserve sells bonds as a part of a contractionary monetary policy, there is
a decrease in the money supply and an increase in the interest rate
when the federal open market committe FOMC decides to increase the money supply, it ______ us treasury securties If the FOMC wishes to decrease the money supply, it _____ us tres securities
BUYS< sells
the federal reserve cannot affect real GDP directly, therefore, the fed typically uses the following as its policy target
interest rates
what are the feds main monetary policy targets
the money supply and interest rates
if the federal open market committee FOMC decides to increase the money supply, it orders the trading desk at the federal reserve bank of New York to
buy us tres securities
if the FOMC orders the trading desk to sell Tres securities
the money supply curve will shift to the left, and the equilibrium interest rate will rise
when the fed conducts monetary policy, the most relevant interest rate is the
short term nominal interest rate
an increase in interest rates affects aggregate demand by
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level
as the interest rate increases
consumption, investment, and net exports decrease, aggregate demand decreases
if the fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right
if the fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left
when the new york times said "the money stays in banks", they referred to a blank in the reserves in banks
an increase
Pushing up the value of the currency" means
increasing the exchange rate between the dollar and other currencies
by increasing us interest rates, the fed would cause the value of the currency to increase because
international investors will demand more us dollars to buy us financial assets that now pay higher interest rates
an increase in the value of the currency would contribute to a slowdown in the growth of the us economy because
us exports will fall and imports from other countries will reise, reducing net exports and aggreate demand
the role of the federal reserve is to remove the punchbowl just as the party gets going, which removing the punchbowl is refering to
engaging in contractionary policy- to restrain aggregate demand
in terms of the economy, just as the party gers going refers to a situation in which real GDP Whats potential GDP, which will result in what to the inflation reate
is greater than , an increase in
the short term interest rate the article "Easy money era a long game for fed" is referring to the
federal funds rate
the fed expects that controlilng that one interst rate would allow it to meet its goals for inflation and unemployment because lower short term interest rates
encourage lending and stimulate econmic activity
the reference to "a broader spectrum of interest rates" means that the fed began to focus on
longer term treasury rates and mortgage rates
policy makers at the fed believe that
although its not perfect, active monetary policy is still a stabilizing force in the economy
increase in the money supply in the us will not
cause the value of investing in the us financial assests to become more desirable to foreign investors
what affects aggregate demand?
interest rates, consumption of durable goods, business investment projects, the value of the dollar
a premature tightening of the pace of purchases would slow down the economic recover because this action would be
contractionary, reducing lending and economic activity
the feds strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy
why would the fed intentionally use contractionary monetary policy to reduce real GDP
the fed intends to reduce inflaiton, which occurs if real GDP is greater than potential GDP
If the fed is too slow to react to a recession and applies an expansionary monetary policy on ly after the econmoy begains to revocer, then
inflation will be higher than if the fed had not acted
a countercyclical policy is one that
is used to attempt to stabilize the economy
with an expansionary monetary policy, investment, consumption, and net exports all @@@@, wchih results in the aggregate demand curve shifting to the @@@@, increasing real GDP and the price level.
increase, right@
if the fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the united states in over an enrire year since the 1930s, we can conclude that the fed has not carried out a contr
this statement is false, a contractionary plicy could result in a lower rate of inflation rather than a fall in the price level
the dynamic aggregate demand and aggregate supply model allows for a more realistic examination of monetary policy over the basic aggreagate supply and aggregate demand model by allowing the economy in the dynamic model to
experience continuous inflation and experience long run economic growth
if the fed decides to carry out an expansionary monetary policy because it believes aggreagate demand will not increase enought to keep the economy at potential GDP, the inflation rate will most liely be lower than it would have been without the policy, i
false
consider the following choices and determine the correct defintion for the monetary rule
a monetary rule is a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition
Milton Friedman would have liked the fed to follow a monetary rule where the
money supply is increased every yrear by a percentage rate equal to the long run growth rate of real GDP
support for a monerary rule of the kind advocated by friedman declined since 1980 because
the feds performance
support for a monetary rule of the kind advocated by friedman declined since 1980 because
the feds perfomance since 1980 has been excellent even without a formal inflation target
what is inflation targeting
committing the central bank to achieve an annoucnced level of inflation
nobel laureate milton friedman and his folloers belong to a school of thought known as monetarism. What do the monetarists argue the fed should target?
the fed should target the money supply, not the interest rate, and that is should adopt the monetary growth rule
credit availability is the ability of
people to obtain credit
problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because
most potential homeowners need mortgages to buy homes
the federal govenment bailed out AIG because
it was the largest insurance company in the nation and the government feared the repercussions of a failure of AIG
the government bailout was controversial because
it was expensive, and other companies suffered through bankruptcy and failire
even though the federal government earned a profit on its investment in AIG, economists and policymakers who opposed the bailout were
not necessarily wrong, because it was an expensive and risky solution
Which of the following events was an important cause of 2007-2009 recession>
the collapse of a housing bubble