Chapter 14 Notes (Cont) Flashcards
1
Q
What is Monetary Policy and the Two Types?
A
- Controlling the growth of the money supply
1. Tight Money Policy
2. Loose Money Policy
2
Q
Tight Money Policy?
A
- decreasing the money supply
- less money means less spending & less inflation can lead to contraction
3
Q
Loose Money Policy?
A
- increasing the money supply
- more money means more spending & expansion but can lead to inflation
4
Q
The three FED Tools?
A
- Reserve Requirement
- Discount Rate
- Open Market Operations
5
Q
Reserve Requirement?
A
- controls how much money banks have to keep
- Helps prevent bank runs or “panics”
6
Q
Discount Rate?
A
- Interest rate FED charges to banks for loans
- Lowering DR allows banks to lower their own interest rates, increasing money supply (loose money supply)
- Increasing DR drives up interest rates, decreasing the money supply (tight money supply)
7
Q
Open Market Operations?
A
- Buying and selling government savings bonds
- Buying bonds increases money supply
- Selling bonds decreases money supply
8
Q
How to Reduce Inflation (tight money policy)?
A
Raise Reserve Requirement
Raise Discount Rate
Sell Government Bonds
9
Q
How to Create Money Expansion (loose money policy)?
A
Lower Reserve Requirements
Lower Discount Rate
Buy Government Bonds
