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ECON 705 - Module 7
Terms in this set (21)
What is monetary policy?
Policies that control the supply of money, the price of money, and the availability of credit.
What is fiscal policy?
Government policy that attempts to manage the economy by controlling taxing and spending.
What are the 2 basic macroeconomic tools that a country can use?
monetary policy and fiscal policy
What is expansionary monetary policy
which means the Fed decided to increase the money supply for the economy and the amount of money that would be available at that point in time should be consistent with the level of production.
If you print too much money, ___ becomes a problem
What is contractionary monetary policy?
the Federal Reserve would take the money out of the system form the economy in order to calm down any inflationary pressure in the economy.
What is open market operations?
the purchase and sale of U.S. government bonds by the Fed
What is the most common way of managing money supply?
open market operations
A certificate issued by a government or private company which promises to pay back with interest the money borrowed from the buyer of the certificate: The city issued bonds to raise money for putting in new sewers.
What is the federal funds rate
the interest rate at which banks make overnight loans to one another
Why do banks get loans overnight?
To fulfill reserve requirement and to have enough cash and reserve as required by the federal reserve
the twin responsibilities of the Federal Reserve, to use monetary policy to ensure price stability and maintain full employment
What is the Federal Open Market Committee (FOMC)?
The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.
They make decisions on how much the Federal Funds rate will be in the market and so on by controlling the amount of the reserve of the economy
consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
a general increase in prices and fall in the purchasing value of money.
What is inflation?
an increase in the general price level in the economy. Has so much linkage with the money supply. If there is so much money in the supply, that will lead to a higher price level, resulting in inflation.
The interest rate on the loans that the Fed makes to banks
Which is higher: discount rate or federal funds rate?
Easier to get loans from other banks than the Feds because the Feds don't want to give an impression that you can come anytime to get some loans.
Why do we need to have the macroeconomic policies like monetary policy and fiscal policy?
We want to smooth business cycle.
When the economy is in recession (which is one side of the business cycle), the Federal Reserve does ____ monetary policy because they want to inject a bit more liquidity (money) into the economy to jumpstart and get out of the recession
How does federal funds rate work with economy?
The federal funders rate is a tool to exercise this monetary policy. If you increase the interest rate during a contractionary period during a heated economy, you're discouraging businesses from borrowing money to expand their business. You're discouraging customers also to borrow money and goods. You're calming down the economy and using the federal funds interest rate as a tool to exercise that. We do not expect the Federal Reserve to rate interest rates in the face of recession, rather we expect them to lower it to help people and businesses borrow and expand their operations.
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