Econ Test- The Fed and Monetary Policy
Terms
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- T/F: There is little agreement among economists on how to control the economy.
- False
- T/F: The number of people employed and the number of people unemployed can rise at the same time.
- True
- T/F: The higher the real Gross Domestic Product, the better off all the people of the country are.
- False
- T/F: All people would be better off if they just had more money.
- False
- T/F: Inflation hurts almost everyone
- True
- T/F: Economic history shows that the cost of lowering inflation is a higher unemployed rate
- True
- 3 Functions of Money
- medium of exchange; store of value; standard/measure of value
- Types of Money
- Commodity money- has alternative uses as commodity, like tea leaves- not a store of value; Flat money- because the government says so (US!); Gold standard- backed by gold (not us)
- Characteristics of Money
- Portable, Durable, Divisible, Stable
- How good are most counterfeits?
- Not very
- Which counterfeit bill is most common?
- $100
- When designing the new bill, what property couldn't change?
- The feel/stiffness/crackle of it
- What is a raised note?
- A dollar that is bleached and the replacing the ink with a higher value
- Member banks
- Commercial banks that hold stock in the federal reserve- State and individual banks have a choice whether to join-, nat'l banks required to join
- Federal Reserve/District Banks
- 12 equal banks that control districts and can loan out money if needed; banker's banks- make loans out to other banks, NOT people
- Board of Governors
- 7 members appointed by the president to 14 year terms- members supervise and regulate the federal reserve
- Functions of the Fed (7)
- Hold reserve deposits for financial institutions; provide a check collection service; supervise member banks; CONTROL THE MONEY SUPPLIES, regulate holding companies, approve bank mergers, regulate margin requirements for stock purchases
- Federal Open Market Committee (FOMC)
- 7 members of the Board of Governors + 5 presidents of district banks- decides monetary policy
- Advisory Councils
- Federal Advisory Council; Consumer Advisory Council; Thrift Institution Advisory Council
- Why change the monetary policy?
- To influence the availability and cost of credit
- T/F: All banks keep a fraction of all deposits in the vault or w/a district bank.
- True
- What can influence what the fed does with the reserve?
- The monetary policy
- Easy money policy
- Fed allows the money supply to grow and interest rates to fall, which stimulates the economy (used when in a recession)
- Tight money policy
- Fed restricts the growth of the money supply, which drives interest rates up and slows down the overall economy.
- Reserve requirement
- The percentage of reserves banks need to keep
- Open Market Operations
- Fed buys gov. securities, writing a check drawn from itself. This puts money "out there" in banks.
- Result of open market operations?
- More money in circulation and lower interest rates
- Margin requirements
- requires individual investors to put more money down w/stockbrokers
- Discount Rate
- interest rate charged to member banks who want to take out a loan with the Fed
- When will the discount rate increase?
- tight money policy- less money available for banks to loan- less money in circulation
- When will the discount rate decrease?
- easy money policy- more money available to loan- more money in circulation