Refer to the above graph. If the supply of money was $200 billion, the interest rate would be: |
Line up the points to get this answer. https://elearn.midlandstech.edu/d2l/lms/quizzing/user/quiz_submissions_attempt.d2l?isprv=&qi=619301&ai=3904524&ou=892381 |
An increase in the money supply is likely to reduce: A) B)
C) D) |
B) Interest rates |
The lending ability of commercial banks increases when the: A) B) C)
D) |
C) Fed buys securities in the open market |
The Federal Reserve alters the amount of the nation’s money supply by: A) B) C)
D) |
C) Manipulating the size of excess reserves held by commercial banks |
What policy tool of the Federal Reserve relies on bank borrowing to be effective? A) B) C) D) |
D) The discount rate |
Interest |
The payment made for the use of money (of borrowed funds) |
Transaction Demand for money |
the amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP. |
Asset demand for money |
the amount of money people want to hold as a store of value; this amount varies inversely with the interest rate. |
Equilibrium interest rate |
The combination of the demand for money with the supply for money. An increase in the supply for money will lower this rate, and a decrease in the supply of money will raise it. |
Interest rates and bond prices are |
Inversely related |
Four Tools of Monetary Policy |
Open market operations, the reserve ratio, the discount rate, and the term auction facility. |
Monetary policy |
the Fed’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth. |
Open-Market Operations |
The buying and selling of U.S. Government securities by the Federal Reserve Banks for purposes of carrying out monetary policy. |
The Reserve Ratio |
The fraction of checkable deposits that a bank must hold as reserves in a Federal Reserve Bank or in it’s own bank vault; also called the reserve requirement. |
Discount Rate |
The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions. |
Term Auction Facility |
The monetary policy procedure used by the Federal Reserve, in which commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system. |
Expansionary Monetary Policy |
Federal Reserve System actions to increase money supply, lower interest rates, and expand real GDP; an easy money policy. The supply of Federal funds increases, lowering the Federal funds rate to a new targeted rate. An expansion of the money supply occurs. |
Restrictive Monetary Policy |
Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation, a tight money policy. The supply of Federal funds decreases, raising the Federal funds rate to a new targeted rate. A multiple contraction of the nation’s money supply occurs. |
Taylor Rule |
For each 1 percent increase of real GDP above potential GDP, the Fed should raise the real Federal funds rate by 1/2 point. |
Econ Chapter 16
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