Questions and Answers
What is an easy money policy?
Monetary policy designed to expand the money supply, increase aggregate demand, and create jobs. The Fed will lower interest rates at this time. Implemented during recessions.
What is a tight money policy?
Monetary policy designed to slow business activity and help stabilize prices. The Fed will raise interest rates at this time. Implemented during times of high inflation.
What is the difference between an easy and tight money policy?
Easy money policies are implemented during recessions, while tight money policies are implemented during times of high inflation.
When is either an easy or tight money policy implemented?
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What are the main components of monetary policy?
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What are open market operations?
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How does the Fed increase or decrease the money supply using the open market operation method?
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What is the discount rate?
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How does the Fed use the discount rate to increase or decrease the money supply?
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What is the reserve requirement?
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How does the Fed use the reserve requirement to increase or decrease the money supply?
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Study Notes
Easy Money Policy
- Expands money supply and increases aggregate demand to create jobs.
- The Federal Reserve (Fed) lowers interest rates during implementation.
- Typically used during economic recessions.
Tight Money Policy
- Aimed at slowing business activity to stabilize prices.
- The Fed raises interest rates during implementation.
- Commonly used during periods of high inflation.
Comparison of Money Policies
- Easy money policies occur during recessions, focusing on stimulating growth.
- Tight money policies are deployed in response to high inflation to curb spending.
Implementation Timing
- Easy money policies target economic downturns, while tight money policies address inflation.
- Tight money policies help stabilize prices by reducing business activity.
Main Components of Monetary Policy
- Open Market Operations: Buying and selling of government securities.
- Discount Rate: Interest rate for member banks borrowing from the Fed.
- Reserve Requirement: Percentage of bank holdings that must be held in reserve.
Open Market Operations
- Involves government securities like bonds and notes.
- Buying securities increases money supply, while selling decreases it.
Fed's Money Supply Adjustment via Open Market Operations
- To increase money supply: The government buys back securities.
- To decrease money supply: The government sells securities.
Discount Rate Role
- Represents the interest rate at which member banks can borrow from the Fed.
- Lowering the rate encourages borrowing and spending, increasing money supply.
- Raising the rate discourages borrowing, decreasing money supply.
Reserve Requirement Function
- The Fed can adjust the percentage of bank holdings required to be kept in reserve.
- Decreasing reserve requirement increases loan availability, boosting money supply.
- Increasing reserve requirement restricts loan availability, reducing money supply.
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Description
Test your knowledge of monetary policy through these flashcards. Understand the concepts of easy and tight money policies, their definitions, and their impacts on the economy. Ideal for students studying economics or finance.