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Transcript
ECO 215 Exam 4 Study Guide Structure of the Federal Reserve System What’s Important? Understand how the purpose of the Federal Reserve System changed in the 1930s and what the Federal Reserve does today. How did the legislation of 1935 change the structure of the Federal Reserve? What is the Fed’s main purpose today? How does this differ from its purposes before 1935? Who runs the Fed? How are these people chosen? What are their terms? Can anyone fire them? What function is served by the FOMC? Monetary Policy Tools What’s Important? Know what the Fed’s major policy tools are, how they are used, and the manner in which the Fed interacts with the banking system to put monetary policy into practice. What are the three major tools of monetary policy? Which is the most important? What are open market operations? How does the Fed conduct them? If the Fed wanted to increase the money supply, what open market operation would it engage in? What is the operating target – the market variable the Fed seeks to control most directly – of open market operations? What is the discount rate? How do changes in the discount rate affect bank behavior? What pattern does the Fed currently follow in setting the discount rate? Do changes in reserve requirements affect the money supply via the monetary base or via the multiplier? What are federal funds? How is the federal funds rate determined? Ceteris paribus, how does an open market purchase of bonds by the Fed affect the federal funds rate? Ceteris paribus, how does an increase in the discount rate affect the federal funds rate? Ceteris paribus, how does an increase in the demand by consumers and businesses for bank loans affect the federal funds rate? Why does the Fed attempt to control the federal funds rate – a rate at which no household or business borrows? Does the Fed hold the federal funds rate perfectly constant, at its target level? If not, why not? Strategy of Monetary Policy What’s Important? The Fed’s strategy summarizes the monetary policy process. You should understand the strategy framework backwards and forwards. Know all the definitions, and understand how the economy reacts to Fed policy and how the Fed reacts to changes in economic variables. What four category headings appear in the schematic drawing of monetary policy strategy? Why does the Fed take a roundabout path when conducting monetary policy? Why doesn’t it simply target the variables that really matter? Can the Fed control the economy? What characteristics must a potential operating target possess? What variables might reasonably serve as operating targets? What distinguishes intermediate targets from operating targets? What variables have been used as intermediate targets? What is a policy indicator? Why are indicators important to policymakers? What determines whether an important macroeconomic variable is a reasonable goal of monetary policy? List some reasonable goals, as well as some unreasonable goals. Why might the Fed choose to target market interest rates, rather than a monetary aggregate? How do interest rates behave when the Fed uses bank reserves as its operating target? Suppose the Fed uses market interest rates as intermediate targets. Could monetary aggregates still be used as policy indicators? If so, how? Suppose the Fed targets the federal funds rate. If aggregate demand growth increases, what will be the effect on bank reserves (assuming the fed funds target doesn’t change)? If the Fed perceives aggregate demand to be growing too fast, how does it adjust its federal funds target? What does it do to make this new target rate effective? Monetary Policy Transmission Mechanism What’s Important? The monetary transmission mechanism describes the paths by which changes in monetary policy affect aggregate demand. You should understand the linkages. How does the interest-rate channel of monetary policy work? How does the exchange-rate channel of monetary policy work? How do changes in asset prices affect investment demand and consumption demand? Monetary policy may work through one or more credit channels. • Why might small businesses suffer more from a credit crunch than large corporations? • How might monetary policy affect a company’s net worth? What problems might a decline in net worth cause the company? • How might monetary policy affect a company’s cash flow? What happens next? What is “credibility”? Why is it important that monetary policy be credible? Why is the pain inflicted by credible anti-inflation policy less than the pain inflicted by a noncredible policy? What is the Taylor Rule? How does it contribute to the maintenance of credibility?
