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22 Cards in this Set
- Front
- Back
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What is the Federal Funds Rate?
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The rate at which financial institutions loan each other funds, usually for meeting their reserve requirements.
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True or False: The Fed does not set the Federal Funds rate.
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True.
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True or False: The Fed sets the Federal Funds rate
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False. The Federal Funds rate is set by the market
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Why do banks loan each other money?
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So they can meet their Reserve Requirement
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What actions does the Fed take to achieve the Federal Funds rate target?
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Buys or sells Treasury securities to manipulate the money supply. Increases in money supply result in lower interest rates. Decreases in M1 result in higher interest rates.
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How does an increase in money supply affect the curves for demand for Federal funds and supply for Federal funds?
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An increase in M1 results in more banks with excess reserves, and fewer banks with deficient reserves. The Demand curve strays left (down), while the supply curve strays right(up), creating a new equilibrium at a lower Federal Funds rate
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How has the recession affected U.S. exports?
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The weak dollar has created more demand for US exports.
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If the Fed is aiming to lower the Federal Funds rate, would they lean towards contractionary monetary policy, or expansionary monetary policy?
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Expansionary. Higher M1 results in increase in loanable funds, which pushes interest rates down
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True or False: Reluctance by businesses to raise prices contributes to the "lag time" that affects the economy.
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True
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Why are businesses reluctant to raise prices after the economy starts to get better?
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They're glad to see more consumer confidence, and they don't want to threaten that.
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The employment act of 1946 claimed responsibility for what 3 areas?
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1) maximum employment 2) maximum purchasing power 3)maximum economic growth
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What does the Fed do all day?
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1) monitoring and regulating banks 2)short term loans to banks 3)consumer protection policy
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What's the primary functions of district Fed offices?
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1)check clearance 2)checking on banks in the district
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Who controls the reserve ratio?
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Congress sets a range of reserve ratio, and the Board of Governors of the Fed decides on an actual number within that range
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Who controls the discount window rate?
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The Board of Governors.
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Who controls decisions about open market operations?
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FOMC (7 sitting members of board of governors + 5 Fed branch presidents)
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Is authority for MP decentralized or centralized?
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Centralized
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Do Congress & the President have any real influence on MP decisions?
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No direct influence
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True or False: If Congress disapproves of the Fed's actions, it cannot threaten the Fed's operating budget
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True.
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True or False: If Congress disapproves of the Fed's actions, it can just take away the Fed's budget.
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False. The Fed gets its operating budget from profits off of open market operations
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Why do some people want the powers of the Fed reduced?
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Critics say that the Fed is not democratic, too few people make decisions, the few that are aren't elected, monetary policy sometimes conflicts with fiscal policy, and the Fed hasn't done a very good job of stabilizing the economy, anyway.
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What do supporters of the Fed claim?
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The Fed is the result of democratic action (Congressional legislation), conflicts with fiscal policy are part of the "checks and balances" that limits the power of Congress, and if we didn't have the Fed, things would be worse.
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