Revise later
SpaceTo flip
If confident
All Flashcards
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.
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.