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Economics 201 Ch 11

Principles of Economics Ch 11

QuestionAnswer
The Federal Reserve System (Commmonly called the Fed) is The U.S. centeral bank
What are the functions of the Federal Reserve System? Control the money supply, supervise and regulate banking institutions, serve as the lender of last resort, hold banks' reseves, supply the economy with currency, and provide check-clearing services.
Paper money (Federal Reserve Notes) is printed by: The Bureau of Engraving and Printing (The Fed does not produce money.)
Monetary Base Currency in circulation plus bank reserves (vault cash bank deposits with the Fed).
When the Fed makes a purchase: The monetary base increases.
When the Fed makes a sale: The monetary base decreases.
Actual Monay Multiplier = Change in Money Supply / Change in Monetary Base
What are the tools for controling the money supply? Open market operations, changing the reserve requirement, and changing the discount rate.
Federal Funds Rate The interest rate one bank charges another bank to borrow reserves.
Discount Rate The interest rate the Fed charges banks that borrow reserves from it.
One-shot Inflation A one-time increase in the price level. Can come from the demand side of the economy, or from the supply side. Can be caused by an increase in AD or by a decrease in SRAS.
Continued Inflation The price level increases at a high rate year after year.
What are the effects of inflation? It decreases the buying power of people who hold money, it reduces the real interest rate earned on savings, if it increases it benefits borrowers and hurts lenders, and it increases uncertainty and can thus discourage investment.
Real Interest Rate = Nominal interest rate - Inflation rate
Open Market Operations Refers to the Fed buying and selling U.S. government securities in the open market.
Created by: dengler
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