Monetary Policy Flashcards

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?

Easy money policies are implemented during recessions, while tight money policies are implemented during times of high inflation. Signup and view all the answers

What are the main components of monetary policy?

Open market operations, the discount rate, and the reserve requirement. Signup and view all the answers

What are open market operations?

The buying and selling of government securities, such as bonds, notes, etc. Signup and view all the answers

How does the Fed increase or decrease the money supply using the open market operation method?

To increase the money supply, the government buys back their securities; to decrease it, they sell government securities. Signup and view all the answers

What is the discount rate?

The raising and lowering of the interest rate that member banks can borrow money from the Federal Reserve Bank. Signup and view all the answers

How does the Fed use the discount rate to increase or decrease the money supply?

To increase the money supply, they lower the interest rate to encourage borrowing; to decrease it, they raise the rate to discourage borrowing. Signup and view all the answers

What is the reserve requirement?

The raising and lowering of the percentage of member bank holdings that must be kept in reserve at a Federal Reserve Bank. Signup and view all the answers

How does the Fed use the reserve requirement to increase or decrease the money supply?

To increase the money supply, the Fed decreases the reserve requirements; to decrease it, they increase the requirements. Signup and view all the answers

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.

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.