Monetary Policy & the Federal Reserve

Questions and Answers

What is an Easy Money Policy?

Monetary policy that does not affect the money supply

Monetary policy that increases the money supply (correct)

Monetary policy affecting only government spending

Monetary policy that decreases the money supply

What does a Tight Money Policy do?

Increases the money supply

Decreases the money supply (correct)

Keeps the money supply stable

Encourages inflation

What is the FOMC?

Federal Open Market Committee

What are Government Bonds/Securities?

US Treasury bonds issued by the government Signup and view all the answers

What is the function of the Federal Reserve?

Central bank of the United States Signup and view all the answers

What is the Discount Rate?

Interest rate on loans from the Fed to banks Signup and view all the answers

What are Federal Reserve Districts?

Twelve banking districts created by the Federal Reserve Act Signup and view all the answers

Who is the Fed Reserve Chairman?

Head of the Federal Reserve Bank Board of Directors Signup and view all the answers

Define Monetary Policy.

Tool of national governments to influence economic conditions Signup and view all the answers

What is Fiscal Policy?

Government policies relating to spending and taxation Signup and view all the answers

What is Inflation?

General increase in prices Signup and view all the answers

What does GDP stand for?

Gross Domestic Product Signup and view all the answers

What is Unemployment?

Number of people able to work but without jobs Signup and view all the answers

What are Open Market Operations?

Buying and selling government securities to change money supply Signup and view all the answers

What are Government Securities?

Government borrowings in the form of Treasury notes, bills, or bonds Signup and view all the answers

Define Aggregate Demand.

Total quantity of goods and services all buyers want to purchase Signup and view all the answers

The Fed can increase the money supply by lowering the ______.

discount rate Signup and view all the answers

To decrease the money supply, the Fed can raise the ______.

discount rate Signup and view all the answers

Study Notes

Easy Money Policy

Aims to increase the money supply to stimulate the economy
Actions include lowering the discount rate, reducing reserve requirements, and purchasing government securities

Tight Money Policy

Focuses on decreasing the money supply to reduce inflationary pressures
Strategies involve increasing discount rates to slow down aggregate demand

FOMC

Federal Open Market Committee makes key decisions affecting the economy by adjusting the money supply
Considered the most influential committee within the Federal Reserve

Government Bonds/Securities

U.S. Treasury bonds issued by the government with various terms including 3 months, 6 months, and 1 year

Federal Reserve

Established in 1913 under the Federal Reserve Act, serving as the central bank of the U.S.
Operates as an independent agency in the federal executive branch, regulating banking and national monetary policy
Oversees financial stability and is owned by commercial banks

Discount Rate

The interest rate charged for loans from the Federal Reserve to financial institutions

Federal Reserve Districts

The Federal Reserve Act created twelve banking districts; Georgia operates under the Atlanta district

Fed Reserve Chairman

Leads the Federal Reserve Bank Board of Directors and serves on the FOMC
Appointed by the U.S. Senate

Monetary Policy

A government tool to influence macroeconomic conditions such as inflation, unemployment, and economic growth
Implemented through changes in interest rates or exchange rates

Fiscal Policy

Government economic strategies focused on modifying spending and taxation levels to influence economic conditions

Inflation

Characterized by a general rise in prices, with a target inflation rate set by the Fed at no more than 2%

GDP (Gross Domestic Product)

Measures the total market value of all final goods and services produced annually, with a Fed target growth rate of 3-5% for job creation
Concept originated from economist John Maynard Keynes

Unemployment

Represents individuals actively seeking work but unable to find employment
The Fed targets an unemployment rate of 5% or less

Open Market Operations

Involves buying and selling government securities to adjust the money supply directly

Government Securities

Include Treasury notes, bills, and bonds representing government borrowings, typically offering low interest due to government backing

Aggregate Demand

The total demand for goods and services in an economy from various sectors including consumers, firms, government, and foreigners, equivalent to GDP

Ways to Increase Money Supply

Strategies include lowering the discount rate, reducing reserve requirements, and buying government securities

Ways to Decrease Money Supply

Measures involve raising the discount rate, increasing reserve requirements, and selling government securities

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Description

This quiz covers key concepts of monetary policy and the Federal Reserve, focusing on Easy Money Policy and Tight Money Policy. It provides a clear understanding of how these policies affect the economy and money supply. Test your knowledge with these flashcards!