All Flashcards
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 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.
What is the impact of lowering interest rates on investment spending?
Lower interest rates decrease the cost of borrowing, leading to increased investment spending.
What is the impact of increasing the money supply on aggregate demand?
Increasing the money supply lowers interest rates, encouraging borrowing and spending, thus increasing aggregate demand.
What is the effect of contractionary policy on the price level?
Contractionary policy reduces the money supply and aggregate demand, leading to a lower price level.
How does the Fed's monetary policy impact long-term economic growth?
By maintaining price stability and full employment, monetary policy creates a stable environment conducive to long-term economic growth.
What are the potential drawbacks of expansionary monetary policy?
Expansionary monetary policy can lead to inflation if the money supply increases too much.
What are the potential drawbacks of contractionary monetary policy?
Contractionary monetary policy can lead to a recession if it reduces aggregate demand too much.
How effective is monetary policy during a liquidity trap?
Monetary policy may be less effective during a liquidity trap when interest rates are already near zero.
How does monetary policy affect exchange rates?
Changes in interest rates due to monetary policy can affect the value of a country's currency relative to others.
What is the role of the Fed in maintaining financial stability?
The Fed acts as a lender of last resort and regulates banks to maintain stability in the financial system.
How does monetary policy affect expectations about future inflation?
Credible monetary policy can anchor inflation expectations, making it easier to control actual inflation.