Chapter 14: Monetary Policy Flashcards
(33 cards)
What is monetary policy?
The use of money and credit controls to influence macroeconomic outcomes.
What is the structure of the Federal Reserve?
12 regional banks, a Board of Governors (7 members), and a Fed Chair.
Who appoints the Fed’s Board of Governors?
The U.S. president, with Senate confirmation.
How long is a Fed Governor’s term?
14 years (non-renewable).
Who is the current Fed chair (as of the slides)?
Jerome Powell
What services do regional Fed banks provide?
Check clearing, holding reserves, issuing currency, and making loans to banks.
What are the three main tools of monetary policy?
Reserve requirements, discount rate, and open market operations.
What are reserve requirements?
Minimum reserves a bank must hold, based on deposits.
How do reserve requirements affect lending?
Lower requirements increase lending capacity; higher requirements reduce it.
What happens if reserve requirements decrease?
Excess reserves and the money multiplier increase.
What is the formula for lending capacity?
Excess reserves × money multiplier
What are three sources of last-minute reserves for banks?
Federal funds market, securities sales, discounting.
What is the federal funds market?
A system where banks lend reserves to each other short-term.
What is the federal funds rate?
The interest rate banks charge each other for overnight loans.
What is discounting?
When banks borrow reserves from the Fed’s discount window.
What is the discount rate?
The interest rate charged by the Fed for lending to private banks.
How does the discount rate affect borrowing?
Lower rates encourage borrowing; higher rates discourage it.
What are open market operations?
The Fed buying or selling government bonds to change bank reserves.
How does buying bonds affect reserves?
Increases reserves and lending capacity.
How does selling bonds affect reserves?
Decreases reserves and lending capacity.
How does monetary policy affect aggregate demand?
Changes in money supply shift the AD curve.
What are expansionary monetary policies?
Lower reserve requirements, lower discount rate, and buying bonds.
What are restrictive monetary policies?
Raise reserve requirements, raise discount rate, and sell bonds.
What happens to interest rates when money supply increases?
Interest rates fall.
