monetary policy ch10 Flashcards
(19 cards)
functions of the federal reserve system
- control inflation without triggering recession
- supervise the nation’s banking system
- maintain stability of financial markets
- be the central bank for other banks
objective and functions of central bank
- price stability
- formulating policy
- issuing bank notes
- supervising banks
- managing the foreign currency international reserve
- recording debt
- lender of last resort
- regulating function of forex market
tools used to impact money supply
- reserve requirements
- open market operations
- managing discount rates
- managing inflation and money supply
what are reserve requirements
rules set by the central bank that tell other banks how much money they must keep in reserve
what happens when reserve requirements increase
money supply decreases, lending decreases, economy slows down
when happens when reserve requirements decrease
money supply increases, lending increases, economy speeds up
what is open market operations
fed buying/selling government bonds
what happens when fed sells bonds
money flows from economy to fed. money in economy decreases so economy slows
what happens when fed buy bounds
money flows from fed to economy. money in economy increases so economy speeds up
what happens when discount rates increase
banks borrow less, less money available to lend
what happens when discount rates decreases
banks borrow more, money money available to lend so economy speeds up
what happens if government doubles the amount of money in circulation
twice as much money but same amount of goods/services so business will increase prices then lead to inflation
what happens if less money in circulation
less money to spend but same amount of goods/services so there is oversupply so prices decreases causing deflation
effect of increasing money supply/monetary policy
- interest rate falls
- investment increases
- consumption rises
what happens when monetary policy/money supply decreases
interest rates rise
investment will fall
consumption and net exports will fall
what is portofolio choice
how people decide to split their wealth. cash or bonds(investment)
why can people decide to hold more bonds
because rate of return has increased
what is monetary policy features
- by central bank
- concerned with monetary climate (inflation)
- do not issue bonds
- determine money supply
what is fiscal policy features
- by the government
- taxation and government spending
- issue bonds
- not involved in money supply
- finance of government spending
