Federal Reserve Tools and Money Supply Dynamics in Economics

What is the primary function of the Federal Reserve?

To control the money supply.

What are Open Market Operations?

Tools used by the Fed to increase or decrease the money supply through buying or selling government securities.

What happens during an Open Market Purchase?

The Fed buys US government securities, increasing the money supply.

What is the effect of an Open Market Sale?

The Fed sells US government securities, decreasing the money supply.

What is the Required Reserve Ratio?

A Fed rule specifying the amount of money a bank must hold to back up deposits.

How does the Discount Rate influence the money supply?

If the Fed increases the Discount Rate, banks have less money to offer as checkable deposits, decreasing the money supply.

What is the Federal Funds Rate?

The interest rate banks charge one another to borrow reserves in the federal funds market.

What is the Equation of Exchange?

M x V = P x Q, where M is money supply, V is velocity, P is price level, and Q is real GDP.

What does an increase in money supply (M) typically lead to?

An increase in prices (P), assuming velocity (V) and real GDP (Q) are constant.

What is the impact of a recession on the LRAS curve?

It indicates a need to increase the money supply to move the economy to the right.

What occurs when the economy is on the right of the LRAS curve?

It indicates inflation, necessitating a decrease in the money supply.

What is M1 in terms of money supply?

The total of all checkable deposits.

How does an Open Market Purchase affect M1?

It increases M1 by adding money to bank reserves, allowing for more loans.

What happens to bank reserves during an Open Market Sale?

Reserves decrease as the Fed deducts money from the bank's reserves.

What is the relationship between the Required Reserve Ratio and checkable deposits?

An increase in the ratio decreases checkable deposits, while a decrease increases them.

What was a significant economic effect of the California Gold Rush?

An increase in money supply and velocity led to rising prices of goods and real estate.

What does the term 'velocity' refer to in the context of the Equation of Exchange?

The number of times a dollar bill is passed around in the economy.

What is the formula for calculating prices based on money supply, velocity, and real GDP?

P = (M x V) / Q.

What happens to prices if money supply increases while real GDP decreases?

Prices will go up.

What does 'Reserve Deficient' mean for a bank?

It means the bank has less reserves than required, limiting its ability to create new checkable deposits.

What is the role of the Federal Funds Market?

It is where banks lend reserves to one another, usually for short periods.