4.6: Monetary Policy

Question 1

What are the shifters of the Money Supply

Answer 1

The Reserve Requirement
The discount Rate
Open Market Operations

Question 2

Reserve Requirement

Answer 2

The % of deposits that banks must hold in reserve (% can’t be loaned out)

When Fed increase money supply, it increases the amount of money held in bank deposits.

Bank keep some of the money in reserve & loan out their excess reserves

These loans eventually become deposits for another bank that will loan out their excess reserves

Question 3

If the Fed decreases the Require Requirement?

Answer 3

1. Banks hold less money and have more excess reserves.
2. Banks create more money by loaning out excess
3. Money supply increases, interest rates fall, AD up

Question 4

If the Fed increases the Reserve Requirement?

Answer 4

1. Banks hold more money and have fewer excess reserves
2. Banks create less money
3. Money supply decreases, interest rates up, AD down

Question 5

Discount Rate

Answer 5

The interest rate that the Fed charges commercial banks

Question 6

How does the Fed increase the money supply through the Discount Rate ?

Answer 6

Decrease the Discount Rate ( Easy Money Policy)

Question 7

How does the Fed decrease the money supply using the discount rate ?

Answer 7

Increase the Discount Rate (Tight Money Policy)

Question 8

Open Market Operations

Answer 8

The Red buys or sells gov. bonds (securities)

Most Important and Widely Used Monetary policy

Question 9

How does the Fed increase money supply w/ Open Market Operation?

Answer 9

Buying Bonds

Question 10

How does the Fed decrease Money supply w/ Open Market Operations

Answer 10

Selling bonds

Question 11

Federal Funds Rate

Answer 11

The interest rate that banks charge one another for one-day loans of reserve

Fed can’t tell banks what interest rate to use. Banks decide that.

Reds can influence them by setting a target rate and using open market operation to hit target

Question 12

How does the Federal Funds Rate fluctuate?

Answer 12

Market conditions and are heavily influenced by monetary policy

Question 13

What is the initial change in the money supply when the Fed buys $1000 of bonds?

Answer 13

Bank reserves will go up $1000

Question 14

If the reserve requirement is .5 & the Fed sells $10 million of bonds what will happen to money supply

Answer 14

Decrease

Question 15

The reserve requirement is .1, & Fed buys $10 million