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152 Cards in this Set
- Front
- Back
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Monetary policies are enacted through...
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changes in the money supply
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The Federal Reserve...
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can be important in solving a financial crisis.
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Two responsibilities of the Federal Reserve
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conduct monetary policy
oversee and regulate financial markets |
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Overseeing and regulating financial markets is...
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central to solving the financial crisis
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When did the Federal Reserve system begin operations?
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in 1914.
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The Federal Reserve system does not...
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attempt to maximize profit
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The Federal Reserve system promotes...
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public goals such as economic growth, low inflation, smoothy functioning
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Why was the Federal Reserve established?
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in response to a particularly bad banking panic in 1907
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Two points for the 12 Federal Reserve Bank districts
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assess the economic conditions in a region
provide services to commercial banks |
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Leadership is provided by the...
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Board of Governors
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Two points for the Board of Governors
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seven governors are appointed by the President to 14-year terms
President selects one of the seven as a chairman for a four-year-term |
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Someone new is being appointed to the board of governors...
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every other year
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Who is the current head of the Fed?
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Janet Yellan
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The _________ ____ ________ __________ reviews economic conditions and sets monetary policy
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Federal Open Market Committee
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How many members are in the FOMC?
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12 members who meet 8 times a year
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Who are the 12 members?
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the 7 members of the board of governors plus 5 representatives from the district
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What was the motivation for creating the Fed?
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to stabilize the financial markets and the economy
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Banking panics...
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occur when customers believe one or more banks might be bankrupt
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Two points for banking panics
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depositors rush to withdraw funds
banks have inadequate reserves to meet demand. |
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If every customer comes in to take their money...
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the bank probably won't have enough to give to all of them
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Two ways the Fed prevents bank panics
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supervising and regulating banks
loaning bank funds if needed |
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Money supply =
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currency + reserve/ratio
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Two points for bank panics from 1930-1933
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increased currency held by the public
banks increased their reserve - deposit ratio, which further decreased the money supply |
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Congress created _______ __________ in 1934.
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deposit insurance
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Deposits of less than _________ will be repaid even if the bank goes bankrupt.
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$100000
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What does deposit insurance do?
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decrease incentives to withdraw funds on rumors
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There have been no significant bank panics since...
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1934
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With less risk, depositors pay less attention to...
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whether banks are making prudent investments
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In the 1980s, many savings and loan associations...
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went bankrupt, which cost the taxpayers hundreds of billions of dollars
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Consumption function -
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Cbar + mpc(y-t)
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PAE equation =
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Cbar + mpc(Y-T) + Ip + G + Nx
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The Fed eliminates the output gaps by changing...
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money supply
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The price of bonds and the interest rates are...
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inversely related
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Changes in the money supply cause changes in...
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nominal interest rates
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The government can effect PAE by either
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net taxes or government expenditures
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Interest rates affect...
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planned aggregate expenditure
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If we know Y*, then we can know if we are...
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operating at full employment (Y=Y*)
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Why does the Fed control the money supply?
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to control the nominal interest rate (i)
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Investment and saving decisions are based on...
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the real interest rate (r)
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Fed has some control over...
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the real interest rate
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r =
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i - pi (nominal interest rate minus inflation)
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The Fed has good control over..
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i (nominal interest rate)
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Inflation changes relatively....
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slowly
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Changes in nominal interest rates become...
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changes in real interest rates
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The federal funds rate is the rate...
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commercial banks charge each other on short-term (usually overnight) loans
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Banks borrow from each other is...
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they have insufficient funds to meet demand
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The federal funds rate is a...
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market-determined rate
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To decrease the Federal funds rate, the Fed...
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conducts open market purchases
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If the Fed conducts open market purchases, and reserves increase, so...
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less banks need to borrow money from one another
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Interest rates tend to..
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move together
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Planned aggregate expenditure has components that are...
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affected by R
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Two points for saving decisions of households
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more saving at higher real interest rates
higher savings means less consumption |
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One point for investment by firms
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higher interest rates means less investment
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Investments are made if ______ __ ________ is less than the _______ __ __________.
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cost of borrowing
return on investment |
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Both consumption and planned investment ________ when the interest rate increases
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decrease
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Higher interest rates are associated with...
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less consumption and less planned investment
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In a recessionary gap, we want to...
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decrease the real interest rate
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If we decrease the real interest rate, what happens?
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consumption and investment go up, which causes PAE to go up, which causes Y to go up via the multiplier
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If we are in an expansionary gap, we want to...
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increase the real interest rate
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If we increase the real interest rate,
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Consumption and Ip decrease, which causes PAE to decrease, and Y decreases
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To increase Y, we need to...
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decrease r
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_______ _______ can be used to increase/decrease PAE
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Monetary policy
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A reduction in r shifts...
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the expenditure line upward and closes a recessionary gap
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The fact that we're selling more means that our inventory is ________. If this continues to happen, firms will start _________ their prices, which will lead to ___________.
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decreasing
increasing inflation |
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What can lead to inflation?
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an expansionary gap
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Three points for expansionary gaps leading to inflation
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planned spending is greater than normal output levels at the established prices
short-run unplanned decreases in inventories If gap persists, prices will increase |
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The Fed attempts to close...
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expansionary gaps
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Four points for the Fed attempting to close expansionary gaps
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raise interest rates
decrease consumption and planned investment decrease planned aggregate expenditure decrease equilibrium output |
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To solve an expansionary or recessionary gap problem...
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sub Y for PAE
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Multiplier =
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change in output/change in spending
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Why, in an expansion, would we increase the interest rate?
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because it will decrease spending which will decrease Y
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In short term equilibrium...
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Y = PAE
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Potential output is the...
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maximum output that our economy can sustain
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Where do I want my short run equilibrium?
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at potential output
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An increase in r...
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shifts the expenditure line down and closes the expansionary gap
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The Fed has...
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no more information than we do
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The Fed has limited ability to...
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manage the stock market
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The Fed does not know the "right" prices either because...
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information available to the Fed is publicly available
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Monetary policy is not well suited to addressing an...
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asset bubble
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a speculative increase in asset prices over their underlying market value
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asset bubble
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Fed can raise interest rates and...
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slow the economy, which could result in a recession and rising unemployment
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The debate over the Fed's role in asset prices got new attention...
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after the mortgage meltdown of 2007-2008
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Increasing and decreasing the money supply is only one side. There is also...
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demand for money
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By controlling the money supply...
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the interest rate is going to change
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Controlling the money supply is the...
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primary task of the FOMC
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Two points for controlling the money supply is the primary task of FOMC
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money supply and demand determine the interest rate
Fed manipulates supply to achieve its desired interest rate |
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__________ _________ ________ allocate a person's wealth among alternative forms.
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portfolio allocation decisions
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___________ is owning a variety of different assets to manage risk.
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diversification
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The demand for money is the...
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amount of wealth held in the form of money
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People will hold wealth in...
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lots of different types of assets.
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Money is the...
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most liquid asset
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Demand for money is sometimes called an individuals ________ ________.
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liquidity preference
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The Cost-Benefit principle indicates people will...
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balance the marginal cost of holding money versus the marginal benefit.
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Money's benefit is the...
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ability to make transactions (buy stuff)
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Quantity of money demanded increases...
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with income.
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The greater my income...
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the more stuff I'm going to buy.
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Technologies such as online banking and ATMs have ________ the demand for money.
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reduced
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M1 has decreased from ____ of GDP in 1960 to ____ in 2004.
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28%
12% |
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The marginal cost of holding money is the...
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foregone interest
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Most forms of money pay...
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little or no interest
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Alternative assets such as stocks or bonds have a...
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positive nominal interest rate, which money has zero
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The higher the nominal interest rate, the ________ the quantity of money demanded.
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smaller
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Business demand for money is similar to...
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individuals.
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Businesses hold more than...
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half of the money stock
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Demand for money depends on three things
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nominal interest rate (i)
real income or output (Y) the price level (P) |
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the higher the interest rate...
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the lower the quantity of money demanded
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The higher the level of income...
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the greater the quantity of money demanded
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The higher the price level...
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the greater the quantity of money demanded.
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As interest rate goes down, the quantity of money demanded goes up because...
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the cost of holding money is lower.
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Interaction of the aggregate demand for money and the supply of money...
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determines the nominal interest rate
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The money demand curve has a...
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negative slope
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By holding money...
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i am not investing. That is my price.
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Supply of money demand is...
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controlled by the Fed
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Five things that shift Money Demand
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increase in output
increase in prices technological investments financial advantages foreign demand political instability inflation |
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nominal interest rate =
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price
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money =
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quantity
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Why is supply curve a vertical line/
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because it is controlled by the Fed, so at any given point in time, we can say the money supply is fixed.
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Two shifts in money supply curve
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open market purchases (money supply goes up)
open market sale (money supply goes down) |
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Opportunity cost of holding money is...
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foregone interest if you would've put it in the stock market
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When you sell more of something...
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it becomes more available and the price goes down
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Bond prices are __________ related to the interest rate
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inversely
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Suppose the interest rate is below equilibrium. What is join on
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Quantity of money demanded is more than the money available.
To get more money people sell bonds Quantity of money demanded decreases |
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If bond prices go _____, interest rates ____
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down
rise |
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The Fed policy is stated in terms of...
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interest rates
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What tool does the Fed use?
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the supply of money
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Three points for Fed increases the money supply
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new equilibrium
interest rate decreases to convince the market to hold the new, larger amount of money the public is withholding more money |
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The multiplier tells us how much...
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we must change to return to full employment
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One way to change PAEbar is by changing...
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the interest rate
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Cbar =
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autonomous consumption
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When we manipulate r, we are manipulating...
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planned spending by manipulating the rate
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When we have some output gap that we want to eliminate, we want...
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change planned aggregate expenditure to return to PAEbar
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When the interest rate goes up, autonomous expenditure...
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does down
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To decrease the money supply, the Fed uses...
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open market sales
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What happens when the Fed sells bonds to the public?
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the Supply of bonds increases
the price of bonds decreases the interest rate increases |
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To increase the Money Supply, the Fed uses...
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open market purchases
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If the Fed buys bonds from the public, what happens?
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Demand for bonds increases
price of bonds increases interest rate decreases |
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The fed cannot set the interest rate and the money supply...
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independently
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The Fed policy is announced in terms of interest rates because (three reasons)
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public is not familiar with the size of the money supply
interest rate changes affect planned spending and the level of economic activity interest rates are easier to monitor than the money supply |
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Fed find rate is what...
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the bank charge each other
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Why is there a low discount rate during a recession?
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because we want to decrease the output gap.
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Open market operations are the...
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main tool of money supply
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Fed offers lending facility to banks, called ________ ________ _______.
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discount window lending
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Banks prefer to...
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borrow from each other
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If a bank needs reserves, it can...
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borrow from the Fed at the discount rate
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The ______ _____ is the rate the fed charges banks to borrow reserves
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discount rate
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Lending increases reserves and ultimately ________ the money supply
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increases
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Changes in the discount rate signal _______ (high rate) or _______ (low rate) of the money supply.
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tightening
loosening |
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The Fed can also...
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change the reserve requirement for banks
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The ________ _________ is the minimum percentage of bank deposits that must be held in reserves.
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reserve requirement
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the reserve requirement is....
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rarely changed
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The Fed could increase the money supply by...
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decreasing the reserve requirement and banks would have excess reserves to loan
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The Fed could decrease the money supply by...
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increasing the reserve requirement
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