Practice: AP Macro monetary policy and the Fed

What is the primary goal of monetary policy?

To manage inflation, maximize employment, and stabilize currency.

Expansionary monetary policy increases what?

The money supply to lower interest rates and stimulate economic growth.

What does the Federal Reserve do?

It regulates the U.S. money supply and serves as the central bank.

True or false: The Fed directly controls interest rates.

False, because it influences them through open market operations.

Difference between M1 and M2?

M1 includes cash and checking deposits; M2 adds savings accounts and time deposits.

What is the discount rate?

The interest rate charged to commercial banks for short-term loans from the Fed.

Fill in the blank: The Fed uses _____ to control the money supply.

Open market operations, reserve requirements, and discount rate.

What is contractionary monetary policy?

It decreases the money supply to combat inflation.

True or false: Higher reserve requirements lead to more money creation.

False, because they restrict banks from lending.

What happens during a recession?

The Fed may implement expansionary monetary policy to stimulate growth.

What does quantitative easing entail?

Large-scale purchase of assets by the Fed to increase liquidity and lower interest rates.

True or false: Interest rates rise during inflationary periods.

True, because the Fed raises rates to combat inflation.

What is the federal funds rate?

The interest rate at which banks lend to each other overnight.

Fill in the blank: The Fed's _____ is a key tool in monetary policy.

Open market operations.

What is the primary tool for controlling inflation?

Adjusting the federal funds rate.