Federal Reserve
What is the nickname commonly used to refer to the Federal Reserve?
The Fed
RANDOM REVIEW BONUS: What are the three purposes of money?
Medium of Exchange
Measure of Value
Store of Value
True or False: The Congress of the United States is ultimately in control of monetary policy, because they can direct the Federal Reserve to change its monetary policy.
False
What is is called when the Federal Reserve uses its monetary policy tools to grow the economy?
Expansionary policy
What are the interest rates that are advertised and paid on a loan called?
Nominal Interest Rates
What are the two primary functions of the Federal Reserve?
Regulate commercial banks and oversee monetary policy
How would an increase in the money supply impact interest rates?
Interest rate would decrease
One of the monetary policy tools that the Federal Reserve can use to influence the economy is requiring banks to hold a higher or lower percentage of the money deposited in their banks. What is this called?
Required Reserves or Required Reserve Ratio
When the Federal Reserve wants to cool down an overheating economy experiencing high inflation, it must use which type of monetary policy?
Contractionary policy
What are the interest rates that are adjusted for inflation called?
Real Interest Rates or Real Rates of Return
When interest rates are low, are borrowers more or less likely to borrow money?
More likely to borrow
When there is a decrease in interest rates, what has happened to the money supply?
It has increased
One of the monetary policy tools that the Federal Reserve can use to influence the economy is raising or lowering the interest rates that they charge commercial banks. What is this rate called?
Discount Rate
After the Dot Com bust and then 9-11, the U.S. economy was experiencing low output and unemployment was high. Which type of monetary policy would the Federal Reserve use in this situation?
Expansionary Policy
RANDOM REVIEW BONUS: Currently the U.S currency is an example of which type of Currency?
Fiat money
Is the Federal Reserve allowed to directly set interest rates for banks?
No
What must the Federal Reserve do to the money supply in order to grow the economy?
Increase the Money Supply
One of the monetary policy tools that the Federal Reserve can use to influence the economy is buying or selling treasury bills, also know as government bonds. What is this called?
Open Market Operations
In the late 1970s, prices were rising at an inflation rate of 13% per year. Which type of monetary policy would the Federal Reserve use in this situation?
Contractionary policy
Assume the expected inflation rate is 6% and banks are earning a real rate of return that is -1%. What is the nominal interest rate banks are charging?
5% Nominal Interest Rate
RANDOM REVIEW BONUS: What do economic term that refers to the government implementing legislation that levies taxes or spends government dollars?
Fiscal Policy
What must the Federal Reserve do to the money supply in order to slow down on overheating economy experiencing high inflation?
Decrease the money supply
In your intro to Unit 3 notes, we discussed a 4th, and new, monetary policy tool that was not discussed in the video. What is the 4th monetary policy tool?
Interest on Reserve Balances (IORB)
True or False: In order to fight inflation, the Federal Reserve must implement contractionary policy that will increase unemployment.
True
Toby took out a car loan with a nominal interest rate of 14% expecting inflation to be at 6%. However, inflation ended up being half of his expectations, what was Toby's expected real rate of return and what was it actually? Also, did this help or harm Toby?
All three answers must be correct to earn the points!
Expected Real Interest Rate: 8%
Actual Real Interest Rate: 11%
Harm