Macroeconomics Exam 4

Front 1

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

Back 1

Monetary Policy

Front 2

The Fed has set four monetary policy goals that are intended to promote a well-functioning economy. What are these four goals?

Back 2

1. Price Stability. Rising prices erode the value of money as a medium of exchange and a store of value.
2. High Employment or a Low Rate of Unemployment. Unemployed workers and underused factories and office building reduce GDP below its potential level.
3. Stability of Financial Markets and Institutions. Resources are lost when financial markets are not efficient enough in matching savers and borrowers.
4. Economic Growth. Policymakers aim to encourage stable economic growth because stable growth allows households and firms to plan accurately and encourages long-run investment.

Front 3

What two rates to the Fed try to keep low?

Back 3

1. Unemployment
2. Inflation

Front 4

Feds cannot tell firms what two things?

Back 4

1. How many people to employ
2. What prices to charge for their products.

Front 5

What are the two main Monetary Policy Targets?

Back 5

1. Money Supply
2. Interest Rate

Front 6

Which Monetary Policy Target does the Fed generally focus more on?

Back 6

Money Supply

Front 7

There are many interest rates in the economy but for the purpose of monetary policy, the Fed has targeted which interest rate?

Back 7

Federal Funds Rate

Front 8

In normal times, banks keep few excess reserves. Where do banks get additional reserves?

Back 8

They borrow in the federal funds market from banks that have reserves available.

Front 9

What is the interest rate banks charge each other for overnight loans?

Back 9

Federal Funds Rate

Front 10

The federal funds rate is not set administratively by the Fed. What determines it?

Back 10

Determined by the supply of reserves relative to the demand for them.

Front 11

Who, except banks, cannot borrow or lend in the federal funds market?

Back 11

Households or firms

Front 12

The ability of the Fed to use monetary policy to affect economic variables depends on what?

Back 12

Depends on its ability to affect real interest rates.

Front 13

The Fed sometimes has difficulty affecting long-term interest rates, why is this?

Back 13

Because the federal funds rate is a short-run nominal interest rate.

Front 14

What do changes in interest rates affect?

Back 14

Aggregate demand, which is the total level of spending in the economy.

Front 15

What don't changes in interest rates affect? What does changes in interest rates affect?

Back 15

Don't affect government purchases.
Do affect consumption, investment, and net exports.