Only $35.99/year

Econ FInal

Terms in this set (49)

Easy" and "tight" money are states based on the policies of the Federal Reserve Bank.

When monetary policy is "easy", the Fed is trying to expand the amount of money in the economy, and when money is "tight", the Fed is trying to shrink the amount of money in the economy. The Fed can do this in a number of ways, most easily by selling bonds or lowering the interest rate it charges banks to borrow, but it can also do other things, such as lowering the reserve requirement. Recently, the Fed has decided to open an alternate way for banks to borrow, called the term auction facility.

"Tight" money is when the bank decides there is too much money in the economy, and acts to remove some of it. This can also be accomplished in a number of ways, depending on the Fed's ultimate goal and the speed at which it wishes to accomplish it.

Please note that both of these states are simply relative to a neutral policy, where the Fed isn't trying to influence the money supply. Usually these terms are used as verbs, in terms of whether the Fed is "tightening" or "loosening" the money supply.

The Fed's purpose is to maintain stable prices and to avoid abrupt shifts in the economy. It "tightens" or "loosens" the money supply as it sees the risks in the economy change. If it sees inflation growing, it will tighten the money supply to suppress this. If, on the other hand, the Fed sees the danger of an economic downturn increasing, it will ease monetary policy in order to boost the economy. In essence, the Fed plays a balancing role between containing inflation and maintaining growth.