The Federal Reserve System includes 12 regional banks, each serving a separate district of the country.
Missing Word
12
There are 12 regional Federal Reserve banks. Commercial banks in each district elect a board of directors for their regional bank, and that board chooses the regional bank's president.
Category: Federal Reserve Structure
Question 2
Members of the Fed's Board of Governors are nominated by the President and must be confirmed by the Senate.
Missing Word
Senate
The Senate confirms each governor after the President's nomination. Long terms and Senate confirmation are meant to give governors independence from short-term politics.
Category: Federal Reserve Structure
Question 3
Along with the 7 members of the Board of Governors, 5 regional Federal Reserve bank presidents vote on the Federal Open Market Committee.
Missing Word
5
Five regional bank presidents vote on the FOMC: the president of the New York Fed holds a permanent seat and the other four seats rotate. With the seven governors, the committee has twelve voting members.
Category: Open Market Operations
Question 4
The Federal Open Market Committee typically meets about every 6 weeks to set monetary policy.
Missing Word
6
The FOMC meets roughly every six weeks, about eight times a year, to decide on its interest rate target and open market operations.
Category: Open Market Operations
Question 5
Funds that a commercial bank keeps as vault cash or in its account at the Fed to cover withdrawals are called reserves.
Missing Word
reserves
Reserves are the cash a bank holds in its vault or on deposit at the central bank. Open market operations work by changing the quantity of reserves in the banking system.
Category: Open Market Operations
Question 6
Borrowing at a low interest rate in one market and lending at a higher rate in another market to profit from the gap is called arbitrage.
Missing Word
arbitrage
Arbitrage is profiting from a price difference between markets. Banks arbitrage between the rate the Fed pays on reserves, the discount rate and the federal funds rate, which keeps those rates close together.
Category: Other Policy Tools
Question 7
The chair of the Federal Reserve's Board of Governors is appointed by the President to a term of 4 years, which can be renewed.
Missing Word
4
The chair serves a four-year term and can be reappointed, while each governor's seat on the Board carries a much longer 14-year term. The short chair term gives each President a chance to choose who leads the Fed.
Category: Federal Reserve Structure
Question 8
Bank capital, also called net worth, equals a bank's assets minus its liabilities, and regulators require it to stay positive.
Missing Word
assets
Assets are what a bank owns, such as reserves, loans and bonds. Subtracting liabilities such as deposits from assets gives net worth, and a bank with negative net worth is insolvent.
Category: Bank Regulation
Question 9
Lower interest rates make it cheaper for firms to borrow for investment in new machines and factories, a component of aggregate demand.
Missing Word
investment
Investment is business spending on physical capital such as equipment and buildings. Expansionary monetary policy lowers interest rates, which raises investment and shifts aggregate demand to the right.
Category: Policy and Economic Outcomes
Question 10
In the quantity equation MV = PQ, the letter V stands for velocity, the number of times the average dollar is spent on final output in a year.
Missing Word
velocity
Velocity is nominal GDP divided by the money supply. If velocity were stable, changes in the money supply would translate predictably into changes in nominal GDP.
Category: Quantity Equation
Question 11
Economist Milton Friedman argued that the central bank should increase the money supply at a steady rate of about 3 percent per year.
Missing Word
Friedman
Milton Friedman favored a fixed money growth rule because of long policy lags and political pressure on central banks. The rule lost appeal once M1 velocity became unstable in the 1980s.
Category: Monetary Policy Pitfalls
Question 12
The debate over whether a central bank should follow a fixed formula or decide case by case as conditions change is often called rules versus discretion.
Missing Word
discretion
Discretion means the central bank chooses each policy move in response to current conditions. It is the alternative to a rule, such as a fixed rate of money growth, set in advance.
Category: Monetary Policy Pitfalls
Question 13
A sustained fall in the overall price level, which raises the purchasing power of money, is called deflation.
Missing Word
deflation
Deflation is a negative rate of inflation. Unexpected deflation raises the real value of debts and, near the zero lower bound, can keep real interest rates high when the economy needs them low.
Category: Monetary Policy Pitfalls
Question 14
When the price of an asset such as stocks or houses climbs far above what fundamentals justify and then collapses, economists call the episode a bubble.
Missing Word
bubble
A bubble is a run-up in asset prices that cannot be sustained, followed by a crash. The dot-com stock boom of the late 1990s and the housing price surge of the mid-2000s were both followed by recessions.
Category: Monetary Policy Pitfalls
Question 15
In finance, leverage means using borrowed money to make purchases, which magnifies both gains and losses.
Missing Word
leverage
Leverage is borrowing to finance spending or investment. In a leverage cycle, easy credit pushes asset prices and growth up, and a later credit squeeze deepens the downturn.
Category: Monetary Policy Pitfalls