Chapter 14,15 - Monetary Policy And Economic Growth Flashcards
(32 cards)
What is the federal reserve system and what is their responsibility?
The federal reserve system is the central banking system of the United States. Their central responsibility is MONETARY POLICY
What is monetary policy?
The use of money and credit controls to influence macroeconomic activity
Determinants of the macro economy:
Policy levers - fiscal policy (gov spending and taxes to shift AD curve) and monetary policy (shifts AD curve using money and credit control)
3 outcomes of the macro economy:
Output (Real GDP)
Jobs (unemployment rate)
Prices (inflation, deflation, relative price change)
The federal reserve banks perform many critical systems. Name 4 of them
- Clearing checks between private banks
- Holding bank reserves
- Providing currency
- Providing loans (discounting)
Who holds onto most of the required reserves of private banks?
The fed
Explain the term “discounting”
Term for the fed providing loans to private banks. The interest rate the fed charges to the private banks is called DISCOUNTING
Through what 2 tools does the fed have the power to alter the money (m1) supply?
- Reserve requirements
- Discount rate
Explain how the fed can alter the money supply through reserve requirements
By changing the reserve requirement, the fed can directly impact the lending capacity of the banking system (excess reserves)
A decrease in required reserves directly increases…..
Excess reserves
When excess reserves go up, explain what this effect has on AD
When excess reserves go up, total lending capacity goes up, C goes up, which causes AD to go up and the AD curve will shift to the right
The ability of a banking system to make additional loans is determined by….
Excess reserves and the money multiplier
When multiplier goes up, what happens to the lending capacity?
It goes up
What is the formula for multiplier
Multiplier = 1/req reserve ratio
When required reserves goes down, explain the chain of reactions that leads to a change in the lending capacity
When req reserves goes down, excess reserves goes up, money multiplier goes up, and thus the lending capacity goes up
What is the discount rate?
The rate of interest charged by the federal reserve bank for LENDING RESERVES to private banks
Sometimes, bank reserves run low and they must……
Replenish their reserves temporarily
What is the source for last minute extra reserves for private banks?
-discounting (fed sets rate)
What are the 2 levers of monetary policy?
-discount rates
-reserve requirements
When the fed sets the discount rate very high, what will the private banks do?
This will cause the banks to hold onto more reserves in the FORM OF REQUIRED RESERVES, which will cause excess reserves to go down, lending capacity to go down, c to go down, and ultimately for AD to go down
The ultimate goal of all macro policy is to…..
Stabilize the economy at its full employment potential
Monetary policy may be used to….
Shift aggregate demand
When the problem is unemployment, what is the solution and the tools THE FED can use to achieve that solution
Unemployment - solution is to shift AD curve to the right (increase) Fed can lower the discount rate or reduce the reserve requirement
When the fed sets an extremely low discount rate, what will this cause private banks to do?
This may cause private banks to purposely go under and borrow more because they know they can afford it
