Monetary Policy Review

These flashcards cover key concepts and questions related to monetary policy as discussed in the lecture notes.

What happens when the supply of money is increased?

Investment spending will increase.

What is the purpose of a contractionary monetary policy?

To raise interest rates and restrict the availability of bank credit.

What is monetary policy expected to have its greatest impact on?

Gross investment.

What occurs when monetary authorities sell government securities?

The size of commercial banks' excess reserves decreases, the money supply decreases, and interest rates rise.

What is the interest rate that commercial banks charge each other for very short-term loans called?

Federal funds rate.

When does the lending ability of commercial banks increase?

When the Fed buys securities in the open market.

What is the purchase and sale of government securities by the Fed called?

Open market operations.

If the Federal Reserve buys $4 billion worth of government securities with a 25% reserve requirement, what is the potential increase in the money supply?

$16 billion.

What happens when the Fed buys government securities from commercial banks and the public?

It will be easier to obtain loans at commercial banks.

How does the Federal Reserve primarily regulate the money supply?

By altering the reserves of commercial banks through the sale and purchase of government bonds.

What effect does the sale of government bonds by the Federal Reserve have?

It decreases aggregate demand.

What is expected to happen if the Fed reduces the reserve requirement?

Lower interest rates, an expanded GDP, and a higher rate of inflation.

How is the demand curve for federal funds characterized?

Downward-sloping, because higher interest rates discourage commercial banks from borrowing.

What should the Fed do to achieve long-run noninflationary full-employment output?

Increase aggregate demand by decreasing interest rates.

What could explain why Fed policy might be ineffective?

The liquidity trap.

What does it mean if people prefer to hold money rather than bonds?

It is known as a liquidity trap.