MACROECONOMICS FINAL EXAM
REVIEW - CH 16, 17, 18, 20, 21,
QUESTIONS AND 100% CORRECT
ANSWERS 2026 UPDATED.
(CH16) What are the measures of money? - Answer M1: Currency, checkable deposits,
traveler's checks, demand deposits.
M2: M1+savings deposits, small time deposits, money market mutual funds, selected near
moneys*
*like money but do not serve as a medium of
exchange. (CDs, T-Bills, etc.)
(CH16) Why was the Federal Reserve System created? - Answer Congress created the Fed in
1913 as the central banking organization of the U.S. in an effort to end the numerous financial
panics (recessions) of the
1880s-early 1900s.
There was a particularly bad recession in 1907 that prompted Congress to pass the Federal
Reserve Act to:
"provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford
means of rediscounting commercial paper, to establish a more effective supervision of banking
in the United States."
(CH16) What are the 5 basic functions of the Fed? - Answer 1. Regulating the money supply
2. Clearing checks
3. Acting as the government's fiscal agent
4. Holding Reserves
5. Supervising banks
(CH16) What is the Fed? - Answer It's the central bank of the US.
It's the "bankers bank" meaning it's a lender of last resort to
help banks that need funds.
There are 12 Federal Reserve districts, each with a Fed
district bank.
Each of these banks are set up as corporation owned by
their member banks.
,The districts also include 24 Federal Reserve branch banks.
All national banks are required to become members of the Fed. Member banks are able to vote
for 6 of the district
bank's 9 board members.
The Fed's regions were designed to reflect the
economic diversity of the US in the early 1900s.
They report on the health of their region 8 times a
year.
(CH16) What is the Federal Open Market Committee (FOMC)? - Answer 19 total members
All 7 governors
+The 12 regional bank presidents
Meet 8 times a year to decide the course of action the Fed should take to control the money
supply.
They release the minutes of their meetings ~3 weeks after
they meet to provide transparency while not impacting the
financial markets.
(CH16) Who is responsible for Monetary Policy? - Answer The FOMC is responsible for
deciding the policies the Fed
should adopt to control the money supply.
Set FFR
Remember, national banks are required to become members of the Fed.
They then are required to keep a certain amount of funds in reserve* at the Fed (called reserve
balance accounts).
Any extra funds they have can be lent out at the federal funds rate (OR kept at the Fed if they
are getting a better interest rate from the Fed than from the loans).
(CH16) What is the FFR and who sets it? - Answer The FOMC determine the federal funds
rate (range): which
is the target interest rate commercial banks charge each
other to borrow some of their reserve balances via
overnight transfers (millions of dollars transferred each
night).
, (CH16) What is monetary policy? - Answer Policy that involves changing the rate of growth
of the supply of money in circulation in order to affect the cost and availability of credit.
(CH16) What is Loose/Expansionary Policy? - Answer Makes credit inexpensive and
abundant (might lead to inflation). A loose monetary policy will encourage growth.
● Borrowing is easy
● Consumers buy more
● Businesses expand
● More people are employed
● People spend more
(Inflation)
(CH16) What is Tight/Contractionary Policy? - Answer Makes credit expensive and in short
supply in an effort to reduce inflation. AKA: contractionary policy.
A tight monetary policy controls inflation.
● Borrowing is difficult
● Consumers buy less
● Businesses postpone expansion
● Unemployment increases
● Production is reduced
(Recession)
(CH16) What is the Fed's dual mandate? - Answer "promote effectively the goals of
maximum employment, stable prices, and moderate long term interest rates"
Basically:
1) keep prices stable
2) encourage stable maximum employment.
(CH16) How do banks create money? - Answer Fractional reserve banking
Basics: money deposited in banks creates more money.
Let's say you find $1,000. If you keep the $1,000 in
your pocket, the money supply increases by $1,000.
But...if you deposit that $1,000 in banks, the bank
can use it to create even more money.
REVIEW - CH 16, 17, 18, 20, 21,
QUESTIONS AND 100% CORRECT
ANSWERS 2026 UPDATED.
(CH16) What are the measures of money? - Answer M1: Currency, checkable deposits,
traveler's checks, demand deposits.
M2: M1+savings deposits, small time deposits, money market mutual funds, selected near
moneys*
*like money but do not serve as a medium of
exchange. (CDs, T-Bills, etc.)
(CH16) Why was the Federal Reserve System created? - Answer Congress created the Fed in
1913 as the central banking organization of the U.S. in an effort to end the numerous financial
panics (recessions) of the
1880s-early 1900s.
There was a particularly bad recession in 1907 that prompted Congress to pass the Federal
Reserve Act to:
"provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford
means of rediscounting commercial paper, to establish a more effective supervision of banking
in the United States."
(CH16) What are the 5 basic functions of the Fed? - Answer 1. Regulating the money supply
2. Clearing checks
3. Acting as the government's fiscal agent
4. Holding Reserves
5. Supervising banks
(CH16) What is the Fed? - Answer It's the central bank of the US.
It's the "bankers bank" meaning it's a lender of last resort to
help banks that need funds.
There are 12 Federal Reserve districts, each with a Fed
district bank.
Each of these banks are set up as corporation owned by
their member banks.
,The districts also include 24 Federal Reserve branch banks.
All national banks are required to become members of the Fed. Member banks are able to vote
for 6 of the district
bank's 9 board members.
The Fed's regions were designed to reflect the
economic diversity of the US in the early 1900s.
They report on the health of their region 8 times a
year.
(CH16) What is the Federal Open Market Committee (FOMC)? - Answer 19 total members
All 7 governors
+The 12 regional bank presidents
Meet 8 times a year to decide the course of action the Fed should take to control the money
supply.
They release the minutes of their meetings ~3 weeks after
they meet to provide transparency while not impacting the
financial markets.
(CH16) Who is responsible for Monetary Policy? - Answer The FOMC is responsible for
deciding the policies the Fed
should adopt to control the money supply.
Set FFR
Remember, national banks are required to become members of the Fed.
They then are required to keep a certain amount of funds in reserve* at the Fed (called reserve
balance accounts).
Any extra funds they have can be lent out at the federal funds rate (OR kept at the Fed if they
are getting a better interest rate from the Fed than from the loans).
(CH16) What is the FFR and who sets it? - Answer The FOMC determine the federal funds
rate (range): which
is the target interest rate commercial banks charge each
other to borrow some of their reserve balances via
overnight transfers (millions of dollars transferred each
night).
, (CH16) What is monetary policy? - Answer Policy that involves changing the rate of growth
of the supply of money in circulation in order to affect the cost and availability of credit.
(CH16) What is Loose/Expansionary Policy? - Answer Makes credit inexpensive and
abundant (might lead to inflation). A loose monetary policy will encourage growth.
● Borrowing is easy
● Consumers buy more
● Businesses expand
● More people are employed
● People spend more
(Inflation)
(CH16) What is Tight/Contractionary Policy? - Answer Makes credit expensive and in short
supply in an effort to reduce inflation. AKA: contractionary policy.
A tight monetary policy controls inflation.
● Borrowing is difficult
● Consumers buy less
● Businesses postpone expansion
● Unemployment increases
● Production is reduced
(Recession)
(CH16) What is the Fed's dual mandate? - Answer "promote effectively the goals of
maximum employment, stable prices, and moderate long term interest rates"
Basically:
1) keep prices stable
2) encourage stable maximum employment.
(CH16) How do banks create money? - Answer Fractional reserve banking
Basics: money deposited in banks creates more money.
Let's say you find $1,000. If you keep the $1,000 in
your pocket, the money supply increases by $1,000.
But...if you deposit that $1,000 in banks, the bank
can use it to create even more money.
