# Econ Chapter 16

Total word count: 592
Pages: 2

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 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) Money demand B) Interest rates C) The general price level D) Nominal income B) Interest rates The lending ability of commercial banks increases when the: A) Fed sells securities in the open market B) Treasury collects tax revenues C) Fed buys securities in the open market D) Reserve ratio is raised C) Fed buys securities in the open market The Federal Reserve alters the amount of the nation’s money supply by: A) Minting coins and printing currency that is distributed to banks B) Controlling the assets of the nation’s largest banks C) Manipulating the size of excess reserves held by commercial banks D) Reducing the liabilities of the banking system 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) Check collection B) Open-market operations C) The reserve ratio D) The discount rate 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.

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