ECO 4223 Final Exam – Questions With Detailed Solutions What is the Federal Reserve System? Correct Ans - The central bank of the US and federal government bank.What is meant by the monetary policy? Correct Ans - The means by which the Federal Reserve manipulates the U.S. money supply in order to influence the U.S. economy's overall direction, particularly in the areas of employment, production, and prices.What are the different tools the Fed uses to conduct monetary policy?Correct Ans - Open Market Operations (i.e. feds fund rate), Discount Rate/Window, & Reserve Requirements Which tool does the Fed use the most? Correct Ans - Open Market Operations (fed funds rate) What is the Discount Rate/Window? Correct Ans - The interest rate for borrowing from the fed. The FOMC deliberately sets it higher than the fed funds rate to discourage borrowing.What is the Reserve Requirement? Correct Ans - 10% reserves is the norm for large banks; 3-10% for intermediate, and 3% for smaller banks. (As of March 2020, no reserve requirement exists.) Explain how the Fed expands and contracts the money supply to affect interest rates. For what purpose? Correct Ans - To increase the money
supply: New York Fed buys securities from member banks with cash. Banks
lend this money to borrowers, which increases the money supply.Explain how the Fed expands and contracts the money supply to affect interest rates. For what purpose? Correct Ans - To decrease the money
supply: The New York Fed sells securities to member banks which requires
member banks to pay for it with cash. This effectively reduces the amount of money that banks can lend, which decrease the money supply.
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