Federal Reserve Policy and Tools

The video tutorial explains the three main policy tools used by the Federal Reserve to manage the money supply: open market operations, discount policy, and reserve requirements. It details how these tools influence interest rates, consumption, investment, and ultimately the macroeconomy. The Federal Reserve's actions aim to increase or decrease the money supply, affecting economic activity. However, the effectiveness of these tools is not absolute, as external factors and market participants also play a role.

What is the primary goal of the Federal Reserve when using its policy tools?

• To increase government spending

• To manage the money supply and impact the macroeconomy

• To control inflation directly

• To regulate international trade

What is the main function of the Federal Open Market Committee (FOMC)?

• To set tax rates

• To manage the federal budget

• To regulate foreign exchange rates

• To decide on open market operations

How does the Federal Reserve decrease the money supply through open market operations?

• By increasing the discount rate

• By buying Treasury securities

• By lowering the required reserve ratio

• By selling Treasury securities

What happens when the Federal Reserve lowers the discount rate?

• Interest rates for consumers increase

• Banks are more likely to borrow from the Fed

• The money supply decreases

• Banks are less likely to borrow from the Fed

What is the purpose of the discount rate in the Federal Reserve's discount policy?

• To control inflation directly

• To regulate the stock market

• To determine the rate at which banks borrow from the Fed

• To set the interest rate for consumer loans

How does decreasing the required reserve ratio affect the money supply?

• It decreases the money supply

• It stabilizes the money supply

• It has no effect on the money supply

• It increases the money supply

What is the simple deposit multiplier used for?

• To calculate the potential growth of the money supply

• To determine the interest rate on savings accounts

• To set the federal funds rate

• To measure inflation

What limitation does the Federal Reserve face when using its policy tools?

• It cannot control the willingness of firms and households to borrow

• It cannot buy or sell Treasury securities

• It cannot influence interest rates

• It cannot change the required reserve ratio

Why did the Federal Reserve create new tools after the 2009 financial crisis?

• To control international trade

• To reduce the national debt

• To address unique economic situations

• To increase government revenue

Which of the following is NOT a tool used by the Federal Reserve to manage the money supply?

• Open market operations

• Taxation policy

• Reserve requirements

• Discount policy