Econ chapter 16 Study guide
Why does the fed have a higher degree in political independence?
The governors are appointed life terms
Why did Congress Pass the Federal Reserve act of 1913?
To create a Federal Reserve System and to keep a “Great Depression” From happening
Which banks are required to become members of the Federal Reserve System?
The Federal Reserve Banks and The Board of Governors.
Who issues U.S. paper currency?
The Federal Reserve System
What is one reason commercial banks sometimes borrow money from the Fed?
In financial emergencies such as recessions.
What is the function of a bank examiner?
Make sure that banks are following sound lending practices
Why does the Fed rarely change the reserve requirements?
A small increase in the Required Reserve Ratio would force banks to call in significant numbers of loans.
What activities creates money?
A reduction in reserve requirements. Which increases lending causing the money supply to expand.
Why would the Fed decide to lower reserve requirements?
To increase the money supply!
What monetary does the Fed use the most to change the money supply?
Open market operations to sell government securities in order to alter the money supply.
What is likely the best approach to a recession that is expected to turn into an expansion in a short time?
To keep interest rates low through monetary policy. Tax cuts and no government spending
Why do low interest rates encourage business investment?
A firms cost of borrowing or of using its own funds decreases as the interest rate decreases.
What is the FOMC? What is its role?
The Federal Open Market Committee and makes key monetary policy decisions about interest rates and the growth of the United States money supply.
Why is the inside lag for monetary policy shorter then fiscal policy?
Because Fiscal policy goes through the President and Congress. Monetary policy goes through the FOMC and almost immediately comes into play.
In what ways does the Fed serve the Government?
to provide banking and fiscal services to the federal government
What can the Feds do to make banks lend out more of their reserves?
To change the Reserve Requirement Ratio and reducing the reserve requirement so the can make more loans
What type of policy should the Fed use to counteract a rapid expansion that is causing high inflation?
If the economy is experiencing a rapid expansion that may cause high inflation, the fed may introduce a tight money policy, That is, it will reduce the money supply. The fed reduces the money supply to push interest rates upward.
Why do laissez-faire economists oppose the use of fiscal and monetary policy.
They believe the economy will self adjust quickly