Survey of Economics – Federal Reserve & Monetary Policy (Chapter 16)

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25 question-and-answer flashcards covering the Federal Reserve’s structure, tools, and effects on the money supply, along with key banking concepts from Chapter 16.

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25 Terms

1
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Why did Congress create the Federal Reserve System in 1913?

To end the financial instability caused by bank panics by acting as a lender of last resort.

2
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What is the Federal Reserve’s most important role in today’s U.S. economy?

Controlling the money supply to pursue economic objectives such as stable prices and full employment.

3
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Which three policy tools does the Fed formally use to control the money supply?

Open market operations, discount policy, and reserve requirements.

4
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Which policy tool does the Fed use most frequently to conduct monetary policy?

Open market operations (buying or selling U.S. Treasury securities).

5
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What immediate effect does a Fed purchase of Treasury securities in the open market have on bank reserves?

Bank reserves increase because the sellers deposit the Fed’s payments into their bank accounts.

6
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What immediate effect does a Fed sale of Treasury securities in the open market have on bank reserves?

Bank reserves fall because buyers pay for the securities with funds drawn from their bank accounts.

7
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If the Fed makes a $10 million discount loan to a bank with a 10 % reserve requirement, what is the maximum potential increase in the money supply?

$100 million (initial $10 million × money multiplier of 10).

8
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Who creates most of the money supply in a modern economy?

Commercial banks, by making loans that expand checking-account balances.

9
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How can a central bank "create money" by buying bonds?

The purchase raises bank reserves, enabling banks to make new loans that increase checking deposits—components of the money supply.

10
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What does it mean when Chinese businesses are described as "starved for credit"?

They are unable to obtain needed loans from banks.

11
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How can a higher required reserve ratio contribute to businesses being starved for credit?

Banks must hold more funds as reserves, leaving less available to lend to businesses.

12
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In a fractional-reserve system, what is the difference between a bank run and a bank panic?

A bank run involves depositors of one bank withdrawing funds; a bank panic involves runs at many banks simultaneously.

13
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What happens to the money supply when the Fed lowers the discount rate?

It tends to increase because banks are encouraged to borrow from the Fed and extend more loans.

14
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Which of the following is NOT a Fed policy tool: open-market operations, changing income tax rates, reserve requirements, or discount policy?

Changing income tax rates (that is a fiscal-policy tool, not monetary).

15
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How many Federal Reserve Districts are there in the United States?

Twelve.

16
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How many members serve on the Federal Reserve’s Board of Governors, and for how long are their terms?

Seven members, each serving one non-renewable 14-year term; one of them is appointed chair for a renewable 4-year term.

17
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What body sets the target federal funds rate and directs open-market operations?

The Federal Open Market Committee (FOMC).

18
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Why is the Federal Reserve Bank of New York always a voting member of the FOMC?

Because it executes the FOMC’s open-market operations on behalf of the System.

19
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Which monetary-policy tool is least frequently changed because banks base long-term decisions on it?

The required reserve ratio.

20
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Besides the Fed, which actors influence the money supply through their actions?

Households, firms, and commercial banks.

21
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To increase the money supply, what instruction does the FOMC give the New York Fed’s trading desk?

Buy U.S. Treasury securities from the public (open-market purchase).

22
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What effect does raising the discount rate typically have on bank lending and the money supply?

Banks make fewer loans, which decreases checking deposits and shrinks the money supply.

23
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What is meant by ‘excess reserves’?

Bank reserves held over and above the amount required by regulation.

24
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What is the money multiplier when the required reserve ratio is 10 %?

10 (calculated as 1 ÷ 0.10).

25
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Define monetary policy in one sentence.

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic objectives.