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Econ Test- The Fed and Monetary Policy


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T/F: There is little agreement among economists on how to control the economy.
T/F: The number of people employed and the number of people unemployed can rise at the same time.
T/F: The higher the real Gross Domestic Product, the better off all the people of the country are.
T/F: All people would be better off if they just had more money.
T/F: Inflation hurts almost everyone
T/F: Economic history shows that the cost of lowering inflation is a higher unemployed rate
3 Functions of Money
medium of exchange; store of value; standard/measure of value
Types of Money
Commodity money- has alternative uses as commodity, like tea leaves- not a store of value; Flat money- because the government says so (US!); Gold standard- backed by gold (not us)
Characteristics of Money
Portable, Durable, Divisible, Stable
How good are most counterfeits?
Not very
Which counterfeit bill is most common?
When designing the new bill, what property couldn't change?
The feel/stiffness/crackle of it
What is a raised note?
A dollar that is bleached and the replacing the ink with a higher value
Member banks
Commercial banks that hold stock in the federal reserve- State and individual banks have a choice whether to join-, nat'l banks required to join
Federal Reserve/District Banks
12 equal banks that control districts and can loan out money if needed; banker's banks- make loans out to other banks, NOT people
Board of Governors
7 members appointed by the president to 14 year terms- members supervise and regulate the federal reserve
Functions of the Fed (7)
Hold reserve deposits for financial institutions; provide a check collection service; supervise member banks; CONTROL THE MONEY SUPPLIES, regulate holding companies, approve bank mergers, regulate margin requirements for stock purchases
Federal Open Market Committee (FOMC)
7 members of the Board of Governors + 5 presidents of district banks- decides monetary policy
Advisory Councils
Federal Advisory Council; Consumer Advisory Council; Thrift Institution Advisory Council
Why change the monetary policy?
To influence the availability and cost of credit
T/F: All banks keep a fraction of all deposits in the vault or w/a district bank.
What can influence what the fed does with the reserve?
The monetary policy
Easy money policy
Fed allows the money supply to grow and interest rates to fall, which stimulates the economy (used when in a recession)
Tight money policy
Fed restricts the growth of the money supply, which drives interest rates up and slows down the overall economy.
Reserve requirement
The percentage of reserves banks need to keep
Open Market Operations
Fed buys gov. securities, writing a check drawn from itself. This puts money "out there" in banks.
Result of open market operations?
More money in circulation and lower interest rates
Margin requirements
requires individual investors to put more money down w/stockbrokers
Discount Rate
interest rate charged to member banks who want to take out a loan with the Fed
When will the discount rate increase?
tight money policy- less money available for banks to loan- less money in circulation
When will the discount rate decrease?
easy money policy- more money available to loan- more money in circulation

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