Federal Reserve Bank and Monetary Policy

These flashcards cover key concepts, functions, and mechanisms of the Federal Reserve Bank and monetary policy.

What is the primary responsibility of the Federal Reserve Bank (the Fed)?

The Federal Reserve Bank is responsible for conducting monetary policy in the United States.

What are the two key objectives outlined in the Fed's dual mandate?

Low and predictable levels of inflation and maximum sustainable levels of employment.

What happens to the federal funds rate during an economic contraction?

The Fed lowers the federal funds rate to stimulate lending.

What is the federal funds rate?

The overnight interest rate that banks charge each other for loans of reserves.

What are the three parts that compose the Fed?

Twelve Federal Reserve district banks, a 7-member Board of Governors, and a 12-member Federal Open Market Committee.

What does the Fed do to pursue its dual mandate?

The Fed regulates banks, oversees interbank transfers, and manages macroeconomic fluctuations by manipulating the quantity of bank reserves.

How does the Fed provide liquidity to banks?

By maintaining bank reserves, which consist of deposits at the central bank and physical cash.

What is a stress test in the context of banking regulation?

A financial assessment to ensure a bank's assets exceed liabilities during economic downturns.

What does the 'demand curve for reserves' represent in the Federal Funds Market?

The total quantity of reserves demanded by private banks at each level of the federal funds rate.

What is an open market purchase?

When the Fed buys government bonds from private banks, increasing their reserves.

What effect does an expansionary monetary policy have on economic activity?

It increases the quantity of bank reserves, causing short-term interest rates to fall and stimulating economic activity.

What are some tools the Fed has to manipulate interest rates?

Changing the reserve requirement, adjusting the interest rate on reserves, lending from the discount window, and quantitative easing.

What is the significance of the equilibrium in the Federal Funds Market?

It determines the balance between the demand for and supply of reserves, influencing interest rates.

Why do banks need to have reserves?

Banks need reserves to meet customer withdrawals, to comply with regulatory requirements, and to facilitate daily transactions. They ensure liquidity and stability in the banking system.

What is the Federal Funds Market?

The market where banks lend and borrow reserves from one another, influencing short-term interest rates.

What is the Federal Funds Rate?

The interest rate at which banks lend reserves to each other overnight, serving as a key tool of monetary policy.

When does the demand curve for bank reserves shift?

1. Economic expansion or contraction

2. Changing liquidity needs

3. Changing deposit base

4. Changing reserve requirement

5. Interest paid on deposits at the Federal Reserve affects reserve demand.

What is an open market sale?

When the Fed sells government bonds to private banks, and in return the private banks give some of their reserves.

In what order does Expansionary Monetary Policy occur?

1. Fed lowers short-term interest rates and expands access to credit

2. Long-term interest rates fall

3. Consumption and investment rise; Demand for goods and services rises

4. Labor demand curve shifts to the right