This lesson introduces the Federal Reserve’s role in monetary policy and the traditional tools it uses to influence interest rates, credit, and economic activity.
The U.S. Constitution gives Congress authority to coin money and regulate its value. In 1913, Congress delegated important responsibilities related to these powers to the Federal Reserve. The Fed’s central monetary policy function is to manage interest rates and credit conditions in ways that influence economic activity.
All flashcards
What is monetary policy?
Monetary policy is the management of interest rates and credit conditions to influence economic activity.
What are open market operations?
Central bank purchases or sales of securities used to influence bank reserves and interest rates.
What is a reserve requirement?
A rule specifying the share of a bank’s deposits that it must hold as reserves.
What is the discount rate?
The interest rate banks pay when they borrow directly from the central bank.
How do limited and ample reserves differ?
With limited reserves, banks hold relatively little beyond what they need or are required to hold. With ample reserves, banks hold substantial reserves beyond minimum requirements.
Quiz questions
Which group makes decisions about Federal Reserve open market operations?Answer: The FOMC, with seven governors and five voting regional bank presidents.
If the Fed raises IORB, what tends to happen to banks’ reserve-lending incentives and the federal funds rate?Answer: Banks tend to hold more reserves, putting upward pressure on the federal funds rate.
Why did the Fed use quantitative easing when short-term rates were near zero?Answer: To put downward pressure on long-term interest rates and support credit.
What is the usual reserve effect of a central bank selling securities to banks?Answer: Banks pay with reserves, draining reserves from the banking system.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.