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In 2008, the fed followed an extraordinarily expansionary monetary policy, which was evident by the
decrease in the Fed funds rate from 5 percent in 2007 to 0 percent by late 2008
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On June 30, 04, the fed reserve boosted its target for the federat funds rate for the first time in four years, incresing it from a 46-year low of 1 % to 1.25%. By june 07 the federal funds rate increased to 5%. During the period 04-07, the federal reserve
sold U.S. gov securities thereby contracting funds to the federal funds market
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On June 30, 04, the fed reserve boosted its target for the federat funds rate for the first time in four years, incresing it from a 46-year low of 1 % to 1.25%. The Fed likely made this decision because it believed
inflation might become a prob in 05 and was moving to head off the problem
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The body that oversees the 12 regional federal banks is the
board of governors
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Open market operations are related to
the fed's buying and selling of gov. securities
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the discount rate refers to the
rate of interest the fed charges for loans to banks
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In general, the yield curve is
upward sloping
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Banks can borrow reserves from each other thru
the federal funds market
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the reserve requirement is
minimum ratio reserves to deposits that a bank can have
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When the fed conducts expansionary monetary policy
it shifts the money supply (verticle line) to the right
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Monetary policty that shifts the AD curve from AD0 to AD1 and moves the conomy from A to B
increases both real and nominal output in the short run
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If the Fed increases the required reserve ratio financial insititutions will likely lend out
less than before, decreasing the money supply
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One year the lead sentence in a Wall Street Journal article read, "Tight job markets rising wages, and the economy's continued strength put more pressure on the Federal Reserve to raise short-term interest rates" If the Fed responded to this pressure it would adopt
a contractionary monetary policy that reduces output
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What Fed policy would help the economy out of recession
open market purchases of the gov. securities
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The Fed announces what it is doing with monetary policy in terms of a target for
Federal Funds Rate
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According to the AS/AD model, contractionary monetary policy
increases interest rates, reduces investment, and decreases income
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Suppose the Federal funds rate is 5 percent. If the Fed decides to decrease the target for the Federal funds rate from 5 percent to 4 percent, it should take
an offensive action and reduce reserve requirements
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Expansionary monetary policy is designed to
lower interest rates
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Suppose the money multiplier in the U.S. is 4. If the Fed buys 10 mil dollars of gov. securities, the money supply will
increase by 40 mil
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To decrease the nations money supply the fed can
increase reserve requirements
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Real income
real income = nominal income - price level
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expansionary monetary policy
a policy that increases the money supply and decreases the interest rate. It tends to increase both investment and output
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contractionary monetary policy
policy that decreases the money supply and increases the interest rate. It tends to decrease both investment and output
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Federal open market committee
fed's chief body that decides monetary policy. 12 regional bnaks
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duties of the fed
- 1. conducting monetary policy (influencing the supply of money and credit in the economy)
- 2. supervising and regulating financial institutions
- 3. serving as a lender of last resort to financial insititutions
- 4. providing banking services to the U.S. gov
- 5. issuing coin and currency
- 6. providing financial services to commerical banks , savings and loan associations, savings banks, and credit unions
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secondary reserves
treasury bonds
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discount rate
the rate of interest the fed charges for loans it makes to the banks
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standard yield curve
is upward sloping as the time to maturity increases so does the interest rate
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inverted yield curve
doward sloping as the time to maturity increases the interest rate decreases
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real interest rate
real interest rate= nominal interest rate - expected inflation rate
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expansionary
- Adv:
- 1. interest rates may fall
- 2. economy may grow
- 3. decreases unemployment
- dis:
- 1. inflation may worsen
- 2. capital outflow
- 3. trade deficit may increase
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contractionary
- adv:
- 1. helps fight inflation
- 2. trade deficit may decrease
- 3. capital inflow
- dis:
- 1. risk recession
- 2. increases unemployment
- 3. slows growth
- 4. may help cause short-run political problems
- 5. interest rates may rise
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