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Ch 16: The Federal Reserve and Monetary Policy

Matching
 
 
Identifying Key Terms
Match each term with the correct statement below.
a.
prime rate
f.
easy money policy
b.
required reserve ratio
g.
tight money policy
c.
check clearing
h.
federal funds rate
d.
open market operations
i.
Board of Governors
e.
net worth
j.
Federal Reserve Districts
 

 1. 

 the fraction of deposits that banks must keep on hand
 

 2. 

 the buying and selling of government securities to alter the supply of money
 

 3. 

 interest rate banks charge each other for loans
 

 4. 

 monetary policy that increases the money supply
 

 5. 

 the process by which banks record whose account gives up money and whose account receives money
 

 6. 

 the seven-member group that oversees the Federal Reserve System
 

 7. 

 total assets minus total liabilities
 

 8. 

 rate of interest banks charge on short-term loans to their best customers
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 9. 
Why does the Federal Reserve alter monetary policy?
a.
to regulate the banking industry
b.
to provide services to member banks
c.
to enable banks to clear checks
d.
to lessen the effect of natural business cycles
 

 10. 
What is the cost of money?
a.
the smoothing out of fluctuations in the market
b.
the economy’s use of open market operations
c.
the price of the interest rate
d.
the bank’s use of money creation
 

 11. 
What was one reason the U.S. government started a Federal Reserve system?
a.
to keep the banking power of the United States spread out among various districts
b.
to make sure that the U.S. banks were obeying laws regarding banking
c.
to have a place for banks to deposit their excess deposits
d.
to provide consumers with access to funds for business expansion
 

 12. 
How quickly can an increase in government spending increase the gross domestic product?
a.
immediately
c.
6 months
b.
3 months
d.
1 year
 

 13. 
How could the Federal Reserve encourage banks to lend out more of their reserves?
a.
reduce the discount rate
c.
increase the prime rate
b.
raise the required amount of reserve
d.
reduce the money supply
 

 14. 
How many Federal Reserve Districts are there?
a.
6
c.
12
b.
9
d.
20
 

 15. 
What does “lender of last resort” mean with respect to the Federal Reserve?
a.
It will lend money to a bank in a financial emergency.
b.
It makes decisions about who a bank can lend money to.
c.
It decides interest rates for interbank loans.
d.
It has the power to decide how much money a bank can lend out.
 

 16. 
What type of policy does the Federal Reserve use to counteract an expansion that is causing high interest rates?
a.
fiscal policy
c.
easy money policy
b.
tight money policy
d.
policy lags
 

 17. 
Why does a bank sometimes hold excess reserves?
a.
to be sure they can meet their customers’ demands
b.
to protect against high prices
c.
to make check clearing easier
d.
to keep from lending too much money
 

 18. 
Which of the following is one way the Federal Reserve Bank serves the government?
a.
making loans to the government
c.
minting coins for the government
b.
selling government securities
d.
financing state government projects
 

Short Answer
 
 
Reading a Chart

Fiscal and Monetary Policy Tools
 

Fiscal policy tools

Monetary policy tools
Expansionary tools1.increasing government spending1.open market operations: bond purchases
2.cutting taxes2.decreasing the discount rate
  3.decreasing reserve requirements
Contractionary tools1.decreasing government spending1.open market operations: bond sales
2.raising taxes2.increasing the discount rate
 3.increasing reserve requirements
 

 19. 
What is the difference between fiscal and monetary policy?
 

 20. 
What kind of policy brings tax cuts?
 

 21. 
Who is responsible for using monetary policy tools?
 

Essay
 
 
Critical Thinking
 

 22. 
Cause and Effect How does the Federal Reserve decrease the money supply through open market operations?
 

 23. 
Analyzing Information How does the money multiplier work?
 

 24. 
Making Comparisons What is the difference between an inside lag and an outside lag?
 



 
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