Exam 3: The Fed and Interest Rates

The Fed attempts to control M2 by controlling total reserves of depository institutions.

When reserve requirements are increased, interest rates should increase.

List and briefly describe the channels of transmission of monetary policy.

According to the Taylor Rule the Fed kept interest rates too high from 2004 to 2006 and helped create the mortgage bubble.

The Emergency Economic Stabilization Act of 2008 authorized the increase in deposit insurance from $100,000 to $250,000.

Reserve requirements are not useful for "fine tuning" the economy.

Monetarists think changing the money supply impacts economic units directly rather than just through interest rates.

A significant move by the Fed toward a "tight" money policy is likely to enhance exports.

Monetary policy only works in the long term.

Housing investment is sensitive to changes in interest rates.

An increase in the money supply should ultimately cause security prices to decrease all else equal.

How does the Federal Reserve control the money supply by controlling the size of the monetary base? Note the tools of monetary policy and how each can affect the monetary base and money supply.

High stock prices are a goal of monetary policy.

The Fed perfectly controls the money supply.

If cash drains increase, the Fed may offset their effects with open market sales.

The long term trend in ten year Treasury rates was positive from 1981 to 2014.

Real investment is encouraged by rising interest rates.

Changes in velocity make it harder for the Fed to predict how a change in the money supply will impact the economy.

The experience since 2008 has shown that a decrease in the Fed Funds target rate will not always lead to fewer excess reserves and an increase in bank lending.

Full employment means that everyone in the economy has a job.