REVIEW - Monetary Policy1. What are the three principal tools of monetary policy? Explain how they can be used. Show ANSWER: 2. The following are simplified balance sheets for the commercial banking system and the Federal Reserve system. All figures are in billions of dollars. Consolidated Balance Sheet: Commercial Banking System 3. The following are simplified balance sheets for the commercial banking system and the Federal Reserve system. All figures are in billions of dollars. Consolidated Balance Sheet: Commercial Banking System 4. The following are simplified balance sheets for the commercial banking system and the Federal Reserve system. All figures are in billions of dollars. Consolidated Balance Sheet: Commercial Banking System ANSWERS to questions 2, 3, and 4 : For help see; [text: pp. 263-267] Consolidated Balance Sheet: Commercial Banking System Assets: (1) (2) (3) Reserves $45 ($47) ($48) ($46) Securities 80 80 80 80 Loans 80 80 80 80 Liabilities: Checkable Deposits 200 200 (203) (201) Loans from FRBs 5 (7) 5 5 Consolidated Balance Sheet: Federal Reserve Banks Assets: (1) (2) (3) Securities $80 80 (83) 80 Loans to CBs 5 (7) 5 5 Liabilities: Reserves of CBs 45 (47) (48) (46) Treasury deposits 5 5 5 (4) Federal Reserve notes 35 35 35 35 (a) No direct change in the money supply; bank reserves up by $2 billion; money-creating potential up by $10 billion (5 times $2 billion). (b) Money supply up by $3 billion; bank reserves up by $3 billion; money-creating potential up by 5 times $2.4 (excess reserves) = $12 billion. (c) Money supply up by $1 billion; bank reserves up by $1 billion; money creating potential up by 5 times $.8 = $4 billion. (Assumes $1 billion comes from account in Fed.) 5. What is the difference between the Federal Reserve Banks' purchases of securities from the commercial banking system and those from the public? Give an example. ANSWER: 6. Both Federal Reserve Banks and commercial banks buy and sell government securities, but for substantially different reasons. Explain. ANSWER: 7. Explain how a change in the reserve ratio affects the money supply.
8. Differentiate between easy (expansionary) and tight (contractionary) monetary policies.
9. Which tool of monetary policy is most important? Why?
10.Trace the mainstream view of the cause-effect chain that results from an easy money policy.
11. Trace the cause-effect chain that results from a tight (contractionary) money policy.
12. Suppose the economy is experiencing a recession and high unemployment. What would be the interpretation of how an easy money policy would address this problem?
13. Suppose the economy is experiencing inflation. What would be the interpretation of how a tight money policy would address this problem?
14. Explain two strengths of monetary policy for achieving economic stability.
15. How is the Federal funds rate established? What role does the Federal Reserve play?
16. Explain what is meant by cyclical asymmetry with regard to monetary policy effects.
What happens when the Fed sells government securities quizlet?When the Fed sells US government securities/bonds to banks, reserves decrease, and money supply decreases.
When the Fed sells securities which of the following happens?If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds.
What happens when the Fed sells bonds quizlet?When the Fed sells bonds in open-market operations, it decreases the money supply by reducing the number of dollars in the economy. If the Fed raises the reserve requirement, banks can lend out less of each dollar that is deposited.
When the Fed sells government securities to a bank the?The Fed communicates its decisions about monetary policy by announcing the target for the: Federal funds rate. When the Federal Reserve sells government securities, the money supply: contracts and commercial bank reserves decrease.
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