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ECON 211 Exam 3 Study GuideMonetary System & Monetary Policy➢The Federal Reserve (the Fed)○The central bank of the United States○Central bank■Institution designed to-Oversee the banking system-Regulate the quantity of money in the economy●Board of governors○7 members, 14-year terms○Appointed by the president and confirmed by the Senate●The chairmanDirects the Fed staffPresides over board meetingsTestifies regularly about Fed policy in front of congressional committees.Appointed by the president (4-year term)➢Understand how the Federal Reserve changes the federal funds interest rate○The federal funds rate■Interest rate at which banks make overnight loans to one another●Lender - has excess reserves●Borrower - needs reserves■A change in federal funds rate●Changes other interest rates○The Fed: target the federal funds rate■Open-market operations●The Fed buys bonds○Decrease in the federal funds rate○Increase in money supply●The Fed sells bonds○Increase in the federal funds rate○Decrease in money supply➢Understand the concept and measurement of money○Money - a liquid asset (easily exchanged for goods & services)■Store of value■Unit of account0○Measuring the money supply■M1: cash, currency, demand deposits (checking accounts) - these are narrow■M2: Everything in M1 + savings deposits, small time deposits + money market mutual\funds + a few minor categories➢Understand how changing the federal funds rate also changes the money supply○➢Be able to analyze the short-run and long-run impact of monetary policy on output, employment andprices○➢Difference between the short-run impact of monetary policy and long-run money neutrality○➢Economic outlook and how Fed formulates monetary policy decision
APLIAWhen the Fed conducts open-market purchases,It buy Treasury securities which increases the money supply