Monetary Policy: The Federal Reserve Flashcards

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Questions and Answers

What is the definition of a central bank?

A local bank serving individual customers

An organization that manages investment funds

A bank that only lends money to corporations

The bank within a nation that is responsible for creating monetary policy (correct)

What does it mean to implement?

Use to complete a specific action.

What is a reserve?

To set aside or hold for another.

What are securities?

A means of protection for investments. Signup and view all the answers

Why do economists study the money supply?

To break it down into separate categories based on liquidity. Signup and view all the answers

What are the main goals of monetary policy?

Controlling inflation and reducing unemployment. Signup and view all the answers

What is a recession characterized by?

Increased unemployment, decreased credit, and decreased growth. Signup and view all the answers

What does the central bank aim to influence through monetary policy?

The business cycle Signup and view all the answers

What is the liquidity of the money supply related to?

The amount available for banks to lend and interest rates charged by banks. Signup and view all the answers

What is the goal of expansionary monetary policy?

To lower unemployment by increasing the amount of credit available and decreasing interest rates. Signup and view all the answers

Expansionary policy always leads to reduced inflation.

False Signup and view all the answers

What does contractionary monetary policy aim to achieve?

To decrease inflation by decreasing the amount of credit available and increasing interest rates. Signup and view all the answers

What established the Federal Reserve?

The Federal Reserve Act of 1913. Signup and view all the answers

Who manages the Federal Reserve?

A central board of governors. Signup and view all the answers

What are some functions of the Federal Reserve?

Lending bank money, storing money for banks, regulating banks' behaviors, processing payments between banks, and serving as a lender of last resort. Signup and view all the answers

What are the tools of the Federal Reserve?

All of the above Signup and view all the answers

How does the Federal Reserve influence the money supply?

By buying and selling securities from banks. Signup and view all the answers

What happens when the money supply increases?

It lowers the rates that banks charge each other. Signup and view all the answers

How does changing interest rates affect banks?

Lower interest rates give banks more money to lend; higher interest rates give banks less money to lend. Signup and view all the answers

What happens when the amounts required for banks to hold in reserve are changed?

Changes to reserve requirements affect the amount banks can lend. Signup and view all the answers

How does the Fed respond to recessions?

By increasing the money supply through various tools. Signup and view all the answers

Study Notes

Central Bank and Monetary Policy

Central banks are responsible for creating and overseeing monetary policy within a nation.
Monetary policy aims to control inflation and reduce unemployment.
Central banks manipulate the money supply to navigate the economy between recession and growth.

Understanding Money Supply

Economists analyze the money supply by categorizing it according to liquidity levels.
The liquidity of the money supply affects lending capabilities, interest rates, investment levels, and overall economic growth.

Monetary Policy Types

Expansionary monetary policy increases the money supply to lower unemployment by making credit more available and decreasing interest rates.
Expansionary measures may lead to increased inflation as higher lending and investment rates can accelerate price changes.
Contractionary monetary policy aims to decrease inflation by reducing the money supply, limiting credit access, and raising interest rates.

The Federal Reserve (The Fed)

Founded by the Federal Reserve Act of 1913, The Fed serves as the central bank of the United States, managing monetary policy through twelve district banks.
Managed by a board of governors, The Fed controls lending activities of banks and monetary policy decisions through the Federal Open Market Committee.

Functions of The Federal Reserve

Acts as a bank for financial institutions, lending money, storing funds, regulating banking behaviors, and serving as a lender of last resort.
Key tools include open market operations, interest rate adjustments, and reserve requirements.

Influence of Securities and Interest Rates

The Fed can buy and sell securities to manage the money supply—buying securities provides banks with more capital to lend, while selling securities restricts their lending capacity.
Modifications to the money supply directly impact the Federal Funds Rate, with increased supply lowering interbank lending rates.

Interest Rate Management

The Fed can adjust interest rates charged to banks, influencing their available funds for lending—lower rates enable more lending, higher rates restrict it.
Interest rates paid by The Fed to banks for stored funds can also be altered, affecting banks' cash flow and lending capabilities.

Reserve Requirements

Banks are mandated by law to hold a portion of their funds in reserve; changes to these requirements affect their lending potential.
During recessions, The Fed reacts by boosting the money supply through various actions, including purchasing securities and lowering interest and reserve requirements.

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Description

This quiz covers key terms related to the monetary policy set by the Federal Reserve. Each flashcard provides a specific definition to help you understand important concepts such as central banks, reserves, and securities. Perfect for students of economics and finance.