The Federal Reserve and the Money Supply quiz #1 Flashcards
The Federal Reserve and the Money Supply quiz #1
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Which group within the Federal Reserve is responsible for making policy decisions that change the money supply? The Federal Open Market Committee (FOMC) is responsible for making policy decisions that change the money supply, primarily through open market operations. Do banks protect the economy by infusing money into it, and how does this relate to the Federal Reserve's monetary policy? Banks can help support the economy by lending money, which increases the money supply. The Federal Reserve influences this process by adjusting policies such as the discount rate, reserve requirements, and open market operations to encourage or restrict bank lending. If the Federal Reserve conducts open-market sales, what happens to the money supply? If the Federal Reserve conducts open-market sales, the money supply decreases because the Fed sells Treasury securities to banks, taking money out of circulation. What happens to bank lending when the Federal Reserve raises the discount rate? Bank lending decreases because borrowing from the Fed becomes more expensive, leading to a lower money supply. How does a decrease in the reserve requirement affect the amount banks can loan out? A decrease in the reserve requirement allows banks to loan out more money, increasing the money supply. Why are open market operations considered the most frequently used tool by the Federal Reserve? Open market operations are used most often because they give the Fed precise control over the money supply and can be quickly executed or reversed. When the Fed buys U.S. Treasury securities from banks, what is the immediate effect on the banks' reserves? The banks' reserves increase because the Fed pays them cash for the securities, which boosts the money supply. What is the relationship between the reserve ratio and the money multiplier process? A lower reserve ratio increases the money multiplier effect, allowing more money to be created through bank lending. Who does the Federal Reserve primarily interact with during open market operations? The Federal Reserve primarily interacts with banks, not individual consumers, during open market operations. What makes open market operations easily reversible compared to other monetary policy tools? Open market operations are easily reversible because the Fed can quickly buy or sell securities to adjust the money supply as needed.
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