Macro: Exam 4 (part 3)

1. hold deposit of commercial banks - reserves
2. assists in check-clearing process
3. act as fiscal agents for federal government
4. supervise commercial policy
5. conduct monetary policy
(**independence of the FED**)

functions of the Federal Reserve System

monetary policy

FED (FOMC) sets the target range for the federal funds rate (FFR) to affect market interest rates and overall financial conditions

maximum employment

to achieve goal of _____, stable prices, and economic growth

dual mandate

price stability and full employment (2% - comfort level)

reserve balance accounts

banks hold funds (cash) in their "checking accounts" at the FED

administered rate

these reserve balance accounts earn the interest on reserve balance rate (IORB rate) this is set by the FED

IORB rate

policy tool the FED uses to steer the federal funds rate into the FOMC's target

banks

___ are holding reserve balance accounts at the FED and earning the IORB rate

borrow

banks that need funds to make payments or pay customers can ___ from banks with excess funds

borrowing/lending

This ____ takes place in the federal funds market, a short-term electronic payments market. FED sets target range for the federal funds rate: participants decide

expansionary monetary policy

used to stimulate weakening or recessionary economy

FOMC moves target FFR range down > policy tools used > market interest rates fall > lower interest rates > more spending and workers > higher GDP > upward pressure on prices

How does expansionary monetary policy work?

7\.1

CPI for November 2022 (unadjusted)

restrictive/tight monetary policy

used when the economy is overheating; used to discourage lending and spending

FOMC moves target FFR range up > policy tools used > market interest rates up > higher interest rates > less spending/lending and workers > lower GDP >
prices tend to decline

How does restrictive/tight monetary policy work?

6

FOMC increases the Federal funds target range __ times so far in 2022

.75

4 of the 6 increases in FFR target range a significant ___

3\.75% to 4.00%

What is the current target range?

fiscal policy

manipulation of government spending and taxes

congress and president

Who makes fiscal policy?

recession/slow growth (traditional)

How is fiscal policy used?

\- increase government spending

\- decrease taxes

fiscal policy can…

increase deficit (deficit spending)

what will happen to the budget?

CARES ACT

1. up to $1,200 per taxpayer
2. extra unemployment benefits


1. additional funds for public health, states, students’ loans, large and small businesses

budget surplus

What will happen to the budget for rapid GDP growth?