Monetary Policy Test Flashcards
What is the most important and most used tool of the FED?
Open market operations
How does the FED use open market operations with commercial banks?
The FED buys securities from commercial banks and increases the reserves of commercial banks
Or
The FED sells securities to commercial banks and commercial bank reserves are reduced
How does the FED use open market operations with the public?
The FED buys securities from costumers and the CB collects this money and reserves are increased
Or
The FED sells securities to costumers and the FED collects this money from the CB and reserves are reduced
What is the objective of monetary policy?
To assist the economy in achieving a full-employment,non-inflationary level of total output
High price bonds means what for interest rates?
Low interest rates
Low prices bonds means what for interest rates?
High interest rates
What happens when the FED buys security?
It potentially increases the money supply by providing more excess reserves
What happens when the FED sells securities?
It potentially decreases the money supply by taking away excess reserves for money creation
Bond prices and interest rates are related how?
Inversely
What does raising the reserve ratio do?
It’s increases the amount of money required to be withheld from loans, diminished the ability of a bank to make new loans, and requires banks to get new demand deposits or foreclose on loans
What does lowering reserve ratio do?
Decreased the amount of money required to be withheld from loans, increases loaning ability, and banks can now issue more loans
Why does the FED never raise the reserve ratio?
The banks will be forced to foreclose on loans
What does the discount rate allow the FED to do?
It allows the FED to make short term loans to its members
What does raising the discount rate do?
It discourages banks from borrowing and it decreases money creation
What does lowering the discount rate do?
It encourages banks to borrow, it increases excess reserves
When is the easy money policy used?
In recession
What does the FED do to make credit cheap and available during recession?
The FED buys bonds from banks and the public which increases excess reserves so banks can grant more loans
What does the FED do during recession to increase the money supply?
The FED lowers the discount rate and lowers the reserve ratio
Buying bonds from banks and the public is what policy
Easy money
Lowering the discount rate is what policy?
Easy money
Lowering the reserve ratio is what policy?
Easy money
What is the result of lowering discount rate of lowering reserve ratio?
It lowers the interest rate
When is a tight money policy used?
During inflation
What does the Fed do during inflation to restrict credit?
Sells government bonds and this decreases banks excess reserves
What does the fed do during inflation to decrease the money supply?
Raise the reserve ratio, raise the discount rate
What happens when the fed raises the reserve ratio and discount rate?
Raises the interest rate
