Chapter 14 - Monetary Policy

Money is any commodity or token that is generally acceptable as a​ ______.

Choose the correct statements. 1. Gum does not serve as money because it is not a good store of value. 2. Most people know the price of gum comma so it could serve as money because it is a unit of account. 3. Because most people buy gum comma it can be used as money because it is a useful tool in barter. 4. Gum does not serve as money because it is not generally accepted in exchange for goods and services.

The main components of money in the United States today are​ ______.

Goals of Monetary Policy

Money serves as a _____

Choose the statement about money that is incorrect. A.In the United States today comma money consists of currency and deposits at banks and other depository institutions B.Deposits are money because they can be used to make payments C.Inflation brings a rising value of money.Inflation brings a rising value of money. D.Barter requires a double coincidence of wants

Currency consists of​ _____.

M2 consists of​ _____ plus​ _____ and​ _____ deposits,​ _____, and other deposits.

The functions of depository institutions include all of the following except​ ______. A. lowering the cost of borrowinglowering the cost of borrowing B.lowering the cost of monitoring borrowerslowering the cost of monitoring borrowers C.pooling riskpooling risk D.providing credit ratings

A depository institution creates liquidity by​ ______.

Depository institutions pool risk because they use funds obtained from​ ______ depositors to make loans to​ ______ borrowers.

Depository institutions minimize the cost of monitoring borrowers by​ ______.

A depository institution takes deposits from​ ______ and earns most of its income by​ _______.

The deposits of the following three types of depository institutions make up the​ nation's money:​ ______.

Choose the statement that is incorrect. A. Liquid assets can be sold and instantly converted into cash with virtually no risk of loss. B. Liquid assets have a higher interest rate than securities. C. Liquid assets include overnight loans made by one bank to other​ banks, U.S. government Treasury​ bills, and commercial bills. D. Liquid assets are the​ banks' first line of defense if they need reserves.

Reserves consist of the currency in the​ _____ plus the balance on its​ _____ account at​ _____.

The federal funds rate is the​ _____ rate on​ _____ loans.

The central bank of the United States is the​ ______.

A central bank performs all of the following functions except​ ______. A. it is a public authority that regulates a nation's depository institutions B. it provides general banking services for businesses and individual citizensprovides general banking services for businesses and individual citizens C. it provides banking services to commercial banks provides banking services to commercial banks D. it acts as a bank's bank

The Fed is the lender of last​ resort, which means​ _______.

Choose the correct statements. 1. The FOMC meets approximately every six weeks 2. Current chairman of the Fed is Alan Greenspan 3. The president of the San Francisco Fed is always a member of the FOMC 4. FOMC stands for Federal Open Market Committee

An open market purchase​ ______ the monetary base. An open market sale​ ______ the monetary base.

Choose the statement that is incorrect A. Upper A central bank is a public authority that regulates a nation's depository institutions.A central bank is a public authority that regulates a nation's depository institutions. B. A central bank adjusts the quantity of money in circulation and influences interest rates.central bank adjusts the quantity of money in circulation and influences interest rates. C. The largest commercial banks are known as central banks.largest commercial banks are known as central banks. D. A central bank is a bank's bank.

The monetary base​ ______ and the​ Fed's assets​ ______. The​ bank's total assets​ ______, its reserves​ ______.

Suppose that banks' reserves at the Fedare ​$25 ​billion, Federal Reserve notes are ​$700 ​billion, and the quantity of coins is ​$30 billion. Calculate the monetary base in the United Statesthe monetary base in the United States.

Suppose the Fed buys​ $50 million of government securities from the Bank of America. The​ Fed's total assets​ ______ and its total liabilities​ ______. The Bank of​ America's total assets​ ______ and its total liabilities​ ______.

Choose the statement about the Fed that is incorrect. A. There are 12 Federal Reserve banks and 12 Federal Reserve districts. B. The Board of Governors has seven​ members, who each serve a​ 14-year term. C. The policy decisions of the Federal Open Market Committee are implemented each month by a different Federal Reserve Bank. D. The main​ policy-making organ of the Federal Reserve System is the Federal Open Market Committee.

An open market operation is​ ______.

The Federal Open Market Committee is the​ Fed's _____ committee.

The required reserve ratio is the minimum percentage of​ _____ that​ _____ are required to hold as reserves.

Banks create money by​ ______.

The quantity of money that the banking system can create is limited by​ _______.

The money multiplier is the ratio of the change in the quantity of​ ______ to the change in the quantity of​ ______.

Suppose an increase in the monetary base of ​$2​00,000 increases the quantity of money by ​$400,000. Calculate the money multiplier.

The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio ​- the ratio of​ _____ to​ _____ that the​ _____ plan to hold.

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain ratio

Excess reserves are a​ bank's _____ reserves minus its​ _____ reserves.

Who is responsible for U.S. monetary​ policy? The​ ______ appoints the members and the Chairman of the Board of Governors of the Fed. The​ ______ is responsible for the conduct of monetary policy.

When the Fed lowers the federal funds to combat a recession, the quantity of money ______________

If the quantity of money increases when the Fed lowers the federal funds, aggregate demand ___________ and price level ________ This means real GDP ___________ and unemployment rate ________

The core inflation rate is the rate of increase in the​ ______.

The Fed regards the core PCE deflator as a better measure on which to focus than the CPI because​ ______.

The federal government gets funds to cover its budget deficit by

Financing the budget deficit __________

The Federal Reserve Act makes ____________ responsible for the conduct of monetary policy

A monetary policy instrument is a variable that the​ _____ can directly control or closely target and that influences​ _____ in desirable ways.

The federal funds rate is the interest rate at which banks can borrow and lend​ _____ in the​ _____ market.

The​ Fed's monetary policy instrument is​ _______.

Federal funds rate

The main influences on the FOMC federal funds rate decision are​ _______.

When the Fed lowers the federal funds​ rate, it makes an open market __________ Other​ short-term interest rates and the exchange rate ___________ The quantity of money and the supply of loanable funds ___________ Thus, the long term real interest rate ___________ and the ________ real interest rate _______________ consumption expenditure and investment The ___________ exchange rate makes U.S exports ___________ and imports __________. So net exports ____________ ___________ interest rates _____________ aggregate expenditure Aggregate demand __________, which ___________ real GDP and the price level, relative to what they would have been. Real GDP growth and inflation ______________

When the Fed raises the federal funds​ rate, the U.S. interest rate differential​ ______, and, other things remaining the​ same, the U.S. dollar​ ______.

The​ Fed's actions influence real GDP by changing expenditure plans. Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of consumption expenditure and the​ ______ is the amount of saving. Other things remaining the​ same, the higher the real interest​ rate, the​ ______ is the amount of investment and the​ ______ are net exports. The monetary policy transmission process is almost immediate and its results are relatively easy to predict. True or False?

The​ Fed's actions influence the inflation rate by changing expenditure plans. The inflation rate rises when the Fed makes an open market​ ______. The supply of money​ ______. The interest rate __________ The supply of loanable funds and investment​ ______. Real GDP​ ______ and the price level rises.

Inflation responds ____________________ after the change in the federal funds rate

The ripple effects of an FOMC decision to fight​ recession, in​ order, are:

The United States is experiencing low inflation and real GDP is less than potential GDP. Describe the​ Fed's actions that will restore full employment. The New York Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target. The monetary base ______________. The supply of money __________ and the interest rate __________ The supply of loanable funds​ ______ and the​ long-term interest rate​ ______. Investment​ ______, and aggregate demand​ ______ with a multiplier effect

When the Fed fights​ recession, _______.

The United States economy is experiencing high inflation and real GDP is greater than potential GDP. Describe the actions taken by the Fed to restore full employment. The Fed conducts an open market​ ______ to hit the new​ ______ federal funds rate target. The monetary base ____________ and the supply of money __________ and the interest rate ________ The supply of loanable funds ___________ and the long-term interest rate ________ Investment​ ______, and aggregate demand​ ______ with a multiplier effect. Real GDP moves closer to potential GDP