All Flashcards
What are the differences between monetary and fiscal policy?
Monetary policy is controlled by the Fed and involves managing the money supply and interest rates. Fiscal policy is controlled by the government and involves taxes and spending.
Compare and contrast the discount rate and the federal funds rate.
Both are interest rates, but the discount rate is what the Fed charges banks, while the federal funds rate is what banks charge each other.
What are the key differences between expansionary and contractionary monetary policy?
Expansionary policy increases the money supply to stimulate the economy, while contractionary policy decreases the money supply to curb inflation.
Differentiate between the short-run and long-run effects of monetary policy.
In the short run, monetary policy affects output and employment. In the long run, it primarily affects the price level.
Compare the effects of buying bonds versus decreasing the reserve ratio.
Both actions increase the money supply, but buying bonds does so directly, while decreasing the reserve ratio allows banks to lend more.
What are the advantages and disadvantages of using open market operations?
Advantage: flexible and easily reversible. Disadvantage: impact can be difficult to predict precisely.
Compare the impact of monetary policy on investment vs. consumer spending.
Lower interest rates stimulate both, but investment spending is often more sensitive to interest rate changes.
Contrast the goals of monetary policy during a recession versus during inflation.
During a recession, the goal is to increase output and employment. During inflation, the goal is to stabilize prices.
How does the impact lag differ between monetary and fiscal policy?
Monetary policy typically has a shorter implementation lag but a longer impact lag compared to fiscal policy.
Compare the effectiveness of monetary policy in a closed vs. an open economy.
Monetary policy is generally more effective in an open economy due to the exchange rate channel.
How does lowering the discount rate impact the money supply?
Lowering the discount rate encourages banks to borrow more from the Fed, increasing the money supply.
How does increasing the reserve ratio impact bank lending?
Increasing the reserve ratio reduces the amount of money banks can lend, decreasing the money supply.
How does the Fed buying bonds affect interest rates?
When the Fed buys bonds, it increases the money supply, which puts downward pressure on interest rates.
How does the Fed selling bonds affect inflation?
Selling bonds decreases the money supply, which can help to reduce inflationary pressures.
How does expansionary monetary policy affect unemployment?
Expansionary monetary policy aims to increase aggregate demand, leading to increased production and reduced unemployment.
How does contractionary monetary policy affect inflation?
Contractionary monetary policy aims to decrease aggregate demand, which helps to control inflation.
If the economy is in a recession, should the Fed buy or sell bonds?
The Fed should buy bonds to increase the money supply and stimulate the economy.
If inflation is high, should the Fed raise or lower the reserve ratio?
The Fed should raise the reserve ratio to decrease the money supply and combat inflation.
How does a lower federal funds rate impact consumer spending?
A lower federal funds rate leads to lower borrowing costs for consumers, encouraging spending.
How does monetary policy affect international trade?
Changes in interest rates due to monetary policy can affect exchange rates, which in turn impact international trade flows.
What is Monetary Policy?
Actions by the Federal Reserve to manage the money supply and interest rates to influence aggregate demand and economic stability.
What is Expansionary Monetary Policy?
A policy that increases the money supply to stimulate economic activity, often during recessions.
What is Contractionary Monetary Policy?
A policy that decreases the money supply to curb inflation.
What is the Discount Rate?
The interest rate at which commercial banks can borrow money directly from the Fed.
What is the Reserve Ratio?
The percentage of deposits banks must hold in reserve and cannot lend out.
What are Open Market Operations (OMO)?
The Fed's buying and selling of government bonds to influence the money supply.
What is the Federal Funds Rate?
The interest rate banks charge each other for overnight loans of reserves.
What is a Recessionary Gap?
A situation where the actual output is less than the potential output, leading to high unemployment.
What is an Inflationary Gap?
A situation where the actual output exceeds the potential output, leading to inflation.
What is Aggregate Demand?
The total demand for goods and services in an economy at a given price level.