Business Finance: Unit 5: The Federal Reserve

What is the role of the Federal Reserve?

To control the supply of money to achieve stable prices, full employment, and economic growth.

What does the Federal Funds Rate represent?

The interest rate that banks charge each other to borrow and lend money overnight.

What are the three types of unemployment?

Frictional, Structural, and Cyclical.

Who is the current head of the Federal Reserve?

Jerome Powell.

What is the purpose of the Reserve Requirement?

The percent banks must hold against deposit liabilities.

What happens when the Federal Reserve buys government securities?

It increases the money supply and reduces interest rates.

What is 'deficit spending'?

When government spending exceeds revenues.

What is the difference between the U.S. Treasury and the Federal Reserve?

The U.S. Treasury prints money and collects taxes, while the Federal Reserve manages monetary policy.

What is the consumer price index (CPI)?

A measure that examines the weighted average of prices of a basket of consumer goods and services.

How does the Federal Reserve control the money supply?

Through reserve requirement, discount rate, and open market operations.

What does an increase in the discount rate do?

It increases the cost of borrowing reserves for banks.

Explain 'fiscal policy'.

The federal government’s approach to taxation, spending, and debt management.

What is 'multiple expansion'?

The process by which an increase in excess reserves leads to a larger overall increase in the money supply.

What are 'excess reserves'?

Reserves held by banks over and above the required minimum.

What is inflation?

A general increase in prices across the economy.

What is deflation?

A general decline in prices, opposite of inflation.

What is the targeted federal funds rate?

The goal interest rate set by the Fed for interbank lending.

Define 'recession'.

A period of economic decline, characterized by increased unemployment and reduced output.

What typically results from contractionary monetary policy?

An increase in interest rates and a decrease in the money supply, and a decrese in excess reserves.

What is the role of the Federal Open Market Committee (FOMC)?

To vote on the federal funds rate and guide monetary policy through open market operations.

What is expansionary monetary policy?

A policy that seeks to increase the money supply to stimulate economic growth.

What is contractionary monetary policy?

A policy aimed at decreasing the money supply to curb inflation.

What does increasing the money supply typically lead to?

Lower interest rates, increased borrowing, and higher spending in the economy.

What does decreasing the money supply typically lead to?

Higher interest rates, reduced borrowing, and lower spending in the economy.

What is the structure of the Federal Reserve System?

It consists of a Board of Governors, 12 regional Federal Reserve Banks, and the Federal Open Market Committee (FOMC).

What is the primary goal of expansionary policy?

To reduce unemployment and stimulate economic activity during downturns.

What is the primary goal of contractionary policy?

To maintain price stability and reduce the risk of inflation.