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10 Cards in this Set
- Front
- Back
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Who contributes to making the Federal Reserve an "independent" policy-making body
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Members of the Board of Governors are appointed for 14-year terms. Because members of the Board of Governors are appointed for long (14-year) terms, they can pursue policies with which Congress and the president do not agree. That is what is called independence.
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What tools are available to the Federal Reserve to influence the money supply directly?
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The Fed has three tools of monetary policy: the reserve requirement, the discount rate, and open market operations.
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The money supply expands when the Fed _____ bonds and the money supply contracts when the Fed ____ bonds.
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Buys; sells
When the Fed purchase bonds, it exchanges cash not previously in the money supply for bonds, thereby expanding the money supply. By buying bonds, the Fed expands reserves in the banking system and makes it possible for banks to lend out excess reserves and create money. When the Fed sells bonds, it exchanges bonds for cash that was previously part of the money supply, thereby contracting the money supply. By selling bonds, the Fed removes reserves from the banking system, forcing banks to call in loans and reduce the level of demand deposits, and therefore, the money supply. |
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Which of the following is an alternative monetary policy that the Fed could use to expand the money supply?
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Lower the reserve requirement
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The FOMC wants to expand the money supply by $120 million and decides to buy bonds on the open market. Suppose the reserve requirement is 10% and banks do not hold any excess reserves.
What is the money multiplier? |
10
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Suppose the economy experiences a recessionary gap. Expansionary monetary policy will _______ interest rates and _______ the bond prices.
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decrease; increase
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Why is the money demand curve downward sloping?
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As the interest rate rises, the opportunity cost of holding wealth as money rises.
When the interest rate rises, people forgo more interest when they choose to hold money instead of bonds. People shift their wealth from money into bonds. The result increases the quantity of bonds demanded and decreases the quantity of money demanded. The purchasing power of money falls when the price level rises. |
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Which of the following correctly describes the effects of a contractionary monetary policy according to the Keynesian theory?
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A decline in the money supply raises interest rates, which decreases aggregate demand.
According to the Keynesian model, a contractionary monetary policy starts with a contraction in the money supply. As a result, interest rates rise. This in turn reduces investment as well as other components of aggregate demand, such as certain kinds of interest-sensitive consumption like the purchase of new cars. |
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An increase in the supply of money will lead to _______ in equilibrium real GDP and _______ in equilibrium price level.
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increase, increase
An increase in the money supply causes the AD curve to shift out (to the right), raising equilibrium GDP and the price level. |
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If the Fed increases the money supply:
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it will buy bonds, drive bond prices up, and drive interest rates down.
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