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ECONOMICS
GUIDED READING
CHAPTER 16: “The Federal Reserve and Monetary Policy”
Section 1 “The Federal Reserve System”
pg. 415-418
1. Identify:
A. Board of Governors:
B. Monetary Policy:
C. Federal Reserve Districts:
D. Federal Advisory Council:
E. Federal Open Market Committee:
2. What year was the Federal Reserve Act passed by Congress?
Congress adjusted the structure of the Federal Reserve Act to make it stronger.
What year did this occur?
3. Who owns the Federal Reserve System?
4. Who directs and controls the “FED”?
5. Who selects the members of the Board of Governors?
Who approves their appointment once they are selected?
6. How many members serve on the Board of Governors?
7. What are the terms and limitations on the Board of Governors?
8. How long do the Chairman serve on the Board of Governors?
Name the current Chairman of the “FED”.
9. What is the main role or function of the Chairman?
10. How many Federal Reserve Districts were created by the Federal Reserve Act of 1913?
11. Why were the areas divided into 12 districts?
12. Who is required to join the Federal Reserve System?
Who else may voluntarily join?
13. What role does the Federal Advisory Council serve?
14. What is the key role of the Federal Open Markets committee?
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15. How many members serve on this Board?
Members
are from the Board of Governors and
are elected from the 12 regional
District Bank Presidents. Which Bank President always serves on this committee and
Why?
Section 2
“Federal Reserve Functions”
pg. 420-423
1. Define:
A. Check clearing:
B. Bank holding company:
C. Federal Funds Rate:
D. Discount Rate:
E. Net worth:
2. List four (4) important functions of the Federal Reserve System:
A.
B.
C.
D.
3. The Federal Reserve serves as the
for the U.S. Government. It maintains a
Account for the U.S. Treasury Dept.
4. The Federal Reserve also serves as a financial agent for the Treasury Dept.
What are some of its other services?
5. What is the most visible service performed to help member banks?
6. The “FED” loans money to member banks as a last resort. The rate of interest the “FED”
charges member banks to borrow are called the
.
7. The interest rate that banks charge each other for loans is called?
8. What is the main duty of bank examiners?
9. List four (4) factors that affect demand for money:
A.
B.
C.
D.
10. The “FED” must try to maintain stability in the economy. Too much money in
circulation leads to a general
in prices or
.
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Section 3
“Monetary Policy Tools”
Pg. 425-429
1. Define:
A. Required Reserves Ratio:
B. Money multiplier formula:
C. Excess Reserves:
D. Prime Rate:
E. Open market operations:
2. How do banks create money?
3. The
or
is the fraction of a deposit
that must be kept on reserve.
4. The Required Reserve Ration ensures that banks will have enough funds to supply
customer’s
needs,.
5. As of 1999 U.S. banks were required to hold what percentage in reserves against demand
deposits?
Up to 49 million and
on all in excess of 49
million.
6. Why do banks hold excess reserves?
7. A reduction of the RRR would free up reserves for banks allowing them to make more
or less loans?
Would this lead to an increase in the money supply?
If yes, then why?
8. If the “FED” increased the RRR, what would happen? Explain
9. What is the interest rate called that banks charge their best, most credit worthy customers?
10. By
the discount rate the “FED”
the money
supply and just eh opposite is true if banks
the discount rate.
This reduction in the discount rate will it encourage or discourage banks to make more
loans?
11. What is the most important monetary policy tool used by the “FED”?
12. The three (3) tools used by the “FED” to control the money supply are: List in the order
of most used to toll of last resort.
A.
B.
C.
13. Which of these three tools does the “FED” not use today, but could be used in the future
if the “FED” so chooses, to conduct monetary policy?
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Section 4
“Monetary Policy and Macroeconomics Stabilization”
1. Define:
A. Monetarism:
B. Easy money policy:
C. Tight Money policy:
D. Inside lag:
E. Outside lag:
2. The cost of borrowing is the
, the
price you pay to borrow.
3. If the supply of money is high, interest rates will be
but if the money supply
is low the interest rates are
.
4. If the “FED” wants to expand the economy it will implement a
To encourage business to invest in spending.
5. If the economy is experiencing a rapid expansion it may want to introduce a
to keep inflation under control and reduce the money
supply.
6. Monetary policy must be carefully
if it is to help the macroeconomy.
7. Properly timed
policy smoothes out the ups and downs in a business
cycle. If the
policy is not properly timed it will make the business
cycle worse.
8. List the two major problems in the timing of macroeconomics policy:
A.
B.
9. Do all economists agree on the same approach to handle the ups and downs in the business
cycle
. Why or why not?
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