Download ECONOMICS STUDY GUIDE, CHAPTER SIXTEEN: THE FEDERAL

ECONOMICS STUDY GUIDE, CHAPTER SIXTEEN:
THE FEDERAL RESERVE AND MONETARY POLICY
GEORGIA PERFORMANCE STANDARDS (your objectives
for this chapter):
SSEMA2 Explain the role and functions of the Federal Reserve System.
a. Describe the organization of the Federal Reserve System.
b. Define monetary policy.
c. Describe how the Federal Reserve uses monetary policy tools to promote price stability, full employment, and economic growth.
KEY TERMS
bank holding company a company that owns more than one bank
(p. 421)
Board of Governors the seven-member board that oversees the
Federal Reserve System (p. 416)
check clearing the process by which banks record whose account
gives up money and whose account receives money when a customer
writes a check (p. 421)
discount rate rate the Federal Reserve charges for loans to
commercial banks (p. 422)
easy money policy monetary policy that increases the money
supply (p. 431)
excess reserves in banking. reserves of cash more than the
required amounts (p. 427)
Federal Advisory Council (FAC) the research arm of the Federal
Reserve (p. 418)
federal funds rate interest rate banks charge each other for loans
(p. 422)
Federal Open Market Committee (FOMC) Federal Reserve
committee that makes key decisions about interest rates and the
growth of the United States money supply (p. 418)
Federal Reserve Districts the twelve banking districts created by
the Federal Reserve Act (p. 417)
inside lag delay in implementing monetary policy (p. 432)
monetarism the belief that the money supply is the most important
factor in macroeconomic performance (p. 430)
monetary policy the actions the Federal Reserve takes to influence
the level of real GDP and the rate of inflation in the economy (p. 417)
money creation the process by which money enters into
circulation (p. 425)
money multiplier formula amount of new money that will be
created with each demand deposit; 1 ÷ RRR (p. 426)
net worth total assets minus total liabilities (p. 422)
open market operations the buying and selling of government
securities to alter the supply of money (p. 428)
outside lag the time it takes for monetary policy to have an effect
(p. 432)
prime rate rate of interest banks charge on short-term loans to their
best customers (p. 427)
required reserve ratio (RRR) ratio of reserves to deposits
required of banks by the Federal Reserve (p. 425)
tight money policy monetary policy that reduces the money
supply (p. 431
KEY IDEAS AND CONCEPTS
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The Structure of the Federal Reserve System
The Four Main Functions of the Federal Reserve
What is Monetary Policy?
Money Creation
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Required Reserve Ratio (RRR)
Money Multiplier Formula
Discount Rate
Open Market Operations
COMPARE AND CONTRAST
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Expansionary vs. contractionary policies
Debt vs. deficit
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Easy money policy vs. tight money policy
Policy Timing: inside lags vs. outside lags
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What is the crowding-out effect?
Explain how money creation works.
What is the Required Reserve Ratio (RRR)?
Explain the Money Multiplier Formula and its usage.
What is the discount rate, and why is it important?
What are open market operations?
SAMPLE SHORT ANSWER QUESTIONS
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Name three methods the government uses to grow
the economy via (expansionary) monetary policy.
Name three methods the government uses to slow
the economy via (contractionary) monetary policy.
What is an automatic stabilizer?
Explain hyperinflation.
What is the national debt? How much was it in 2004?
SAMPLE ESSAY QUESTIONS
1.
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3.
How does the Federal Reserve increase and decrease the money supply through open market operations?
Describe the structure of the Federal Reserve. Who owns it, who runs it, who & how many members make up its main parts.
Why does the Fed use open market operations more freely than changing the discount rate or the reserve requirements?