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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 • • • • The Structure of the Federal Reserve System The Four Main Functions of the Federal Reserve What is Monetary Policy? Money Creation • • • • Required Reserve Ratio (RRR) Money Multiplier Formula Discount Rate Open Market Operations COMPARE AND CONTRAST • • Expansionary vs. contractionary policies Debt vs. deficit • • Easy money policy vs. tight money policy Policy Timing: inside lags vs. outside lags • • • • • • 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 • • • • • 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. 2. 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?