Econ chapter 16 Study guide – Flashcards
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Why does the fed have a higher degree in political independence?
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The governors are appointed life terms
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Why did Congress Pass the Federal Reserve act of 1913?
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To create a Federal Reserve System and to keep a "Great Depression" From happening
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Which banks are required to become members of the Federal Reserve System?
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The Federal Reserve Banks and The Board of Governors.
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Who issues U.S. paper currency?
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The Federal Reserve System
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What is one reason commercial banks sometimes borrow money from the Fed?
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In financial emergencies such as recessions.
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What is the function of a bank examiner?
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Make sure that banks are following sound lending practices
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Why does the Fed rarely change the reserve requirements?
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A small increase in the Required Reserve Ratio would force banks to call in significant numbers of loans.
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What activities creates money?
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A reduction in reserve requirements. Which increases lending causing the money supply to expand.
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Why would the Fed decide to lower reserve requirements?
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To increase the money supply!
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What monetary does the Fed use the most to change the money supply?
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Open market operations to sell government securities in order to alter the money supply.
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What is likely the best approach to a recession that is expected to turn into an expansion in a short time?
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To keep interest rates low through monetary policy. Tax cuts and no government spending
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Why do low interest rates encourage business investment?
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A firms cost of borrowing or of using its own funds decreases as the interest rate decreases.
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What is the FOMC? What is its role?
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The Federal Open Market Committee and makes key monetary policy decisions about interest rates and the growth of the United States money supply.
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Why is the inside lag for monetary policy shorter then fiscal policy?
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Because Fiscal policy goes through the President and Congress. Monetary policy goes through the FOMC and almost immediately comes into play.
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In what ways does the Fed serve the Government?
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to provide banking and fiscal services to the federal government
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What can the Feds do to make banks lend out more of their reserves?
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To change the Reserve Requirement Ratio and reducing the reserve requirement so the can make more loans
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What type of policy should the Fed use to counteract a rapid expansion that is causing high inflation?
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If the economy is experiencing a rapid expansion that may cause high inflation, the fed may introduce a tight money policy, That is, it will reduce the money supply. The fed reduces the money supply to push interest rates upward.
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Why do laissez-faire economists oppose the use of fiscal and monetary policy.
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They believe the economy will self adjust quickly
