Monetary Policy and the Federal Reserve ch 11

This set of flashcards reviews key concepts related to the Federal Reserve and its monetary policy framework.

What is the primary role of the Federal Reserve?

To control monetary policy in the United States.

What are the two main goals of the Fed's dual mandate?

Stable prices and maximum sustainable employment.

How does the Fed influence economic conditions?

By setting interest rates through monetary policy.

What is the Federal Open Market Committee (FOMC)?

A committee that decides on U.S. interest rates and monetary policy.

What happens during the FOMC meetings?

Members discuss economic forecasts and policy choices.

What is one challenge the Fed faces in achieving its goals?

The Fed cannot directly change inflation or employment; it influences them through interest rates.

What are the components of the Federal Reserve System?

The Board of Governors and 12 regional Federal Reserve district banks.

Why is the Fed considered an independent government agency?

Its governors are selected by the president and confirmed by the Senate, but it operates separately from the federal government.

What is the nominal interest rate used by the Fed to influence monetary policy?

The federal funds rate.

What is the definition of monetary policy?

The process of setting interest rates to influence economic conditions.

What does it mean when the Fed sets a target for inflation?

The Fed aims to manage expectations and stabilize the economy by ensuring inflation averages around 2%.

Why does the Fed avoid targeting zero inflation?

Zero inflation can lead to issues like deflation and higher unemployment during recessions.

What is forward guidance in the context of monetary policy?

Providing information about future monetary policy to influence market expectations.

What is quantitative easing?

A strategy where the Fed purchases large amounts of securities to lower long-term interest rates.

How does the Fed act as a lender of last resort?

It provides liquidity to financial institutions in times of crisis to prevent financial panic.

What is the zero lower bound limitation?

The Fed cannot set nominal interest rates below zero.

What tools does the Fed use to influence the federal funds rate?

Paying interest on reserves, borrowing overnight, lending through the discount window, and open market operations.

What is the purpose of setting a floor on the federal funds rate?

To establish a minimum interest rate that banks will accept for overnight loans.

What happens when the actual output exceeds potential output?

The Fed raises real interest rates to encourage less spending and cool the economy.

What is the significance of the federal funds rate?

It's the primary tool the Fed uses to adjust monetary policy and influence economic activity.

How does the Fed communicate its decisions and analysis?

Through a clearer communication style aimed at transparency and accountability.