Economics 1500

  1. 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
  2. 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
  3. 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
  4. The body that oversees the 12 regional federal banks is the
    board of governors
  5. Open market operations are related to
    the fed's buying and selling of gov. securities
  6. the discount rate refers to the
    rate of interest the fed charges for loans to banks
  7. In general, the yield curve is
    upward sloping
  8. Banks can borrow reserves from each other thru
    the federal funds market
  9. the reserve requirement is
    minimum ratio reserves to deposits that a bank can have
  10. When the fed conducts expansionary monetary policy
    it shifts the money supply (verticle line) to the right
  11. 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
  12. If the Fed increases the required reserve ratio financial insititutions will likely lend out
    less than before, decreasing the money supply
  13. 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
  14. What Fed policy would help the economy out of recession
    open market purchases of the gov. securities
  15. The Fed announces what it is doing with monetary policy in terms of a target for
    Federal Funds Rate
  16. According to the AS/AD model, contractionary monetary policy
    increases interest rates, reduces investment, and decreases income
  17. 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
  18. Expansionary monetary policy is designed to
    lower interest rates
  19. 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
  20. To decrease the nations money supply the fed can
    increase reserve requirements
  21. Real income
    real income = nominal income - price level
  22. expansionary monetary policy
    a policy that increases the money supply and decreases the interest rate. It tends to increase both investment and output
  23. contractionary monetary policy
    policy that decreases the money supply and increases the interest rate. It tends to decrease both investment and output
  24. Federal open market committee
    fed's chief body that decides monetary policy. 12 regional bnaks
  25. 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
  26. secondary reserves
    treasury bonds
  27. discount rate
    the rate of interest the fed charges for loans it makes to the banks
  28. standard yield curve
    is upward sloping as the time to maturity increases so does the interest rate
  29. inverted yield curve
    doward sloping as the time to maturity increases the interest rate decreases
  30. real interest rate
    real interest rate= nominal interest rate - expected inflation rate
  31. 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
  32. 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
Card Set
Economics 1500
Chapter 12