Monetary Policy & Macroeconomic Flashcards
(16 cards)
What is monetary policy?
A policy that affects the money supply and aims to create economic stability
Monetary policy is administered by a central bank, such as the Federal Reserve in the U.S.
How does monetary policy affect economic stability?
It helps support the Fed’s efforts to create economic stability through the management of the money supply
Proper administration of monetary policy can stabilize the economy.
What is monetarism?
The belief that the money supply is the most important factor in macroeconomic performance
Monetarism emphasizes the role of governments in controlling the amount of money in circulation.
How do interest rates relate to the money supply?
Higher money supply leads to lower interest rates and vice versa
Interest rates are the cost of borrowing money.
What is an easy money policy?
A monetary policy that increases the money supply
This policy is typically used during economic contractions to encourage spending.
What is a tight money policy?
A monetary policy that decreases the money supply
This policy is often implemented to combat inflation during rapid economic expansions.
What happens when the money supply increases?
Interest rates decrease, encouraging greater investment spending
Lower interest rates reduce the cost of borrowing for businesses.
What is the relationship between interest rates and aggregate demand?
Interest rates determine the level of aggregate demand
Lower interest rates typically increase aggregate demand through higher spending and investment.
What is the significance of timing in monetary policy?
Good timing achieves economic stability; bad timing can worsen the business cycle
Properly timed policies can help smooth out economic fluctuations.
What is an inside lag?
The time it takes to implement monetary policy after a problem is identified
Inside lags can delay effective economic intervention.
What are the two reasons for inside lags?
- Time to identify a problem
- Time to enact policies after recognition
Inside lags are more severe for fiscal policy than for monetary policy.
What is the dilemma referred to as ‘pushing on a string’?
A situation where the central bank cannot encourage lending through rate cuts
This occurs when businesses are reluctant to borrow despite lower rates.
What is the chief danger of enacting expansionary policy at the wrong time?
It may lead to high inflation
Timing is crucial to avoid exacerbating economic issues.
How long do economists estimate it takes for the U.S. economy to self-correct?
Estimates range from two to six years
This duration can affect the timing of policy interventions.
What is the impact of lags on monetary and fiscal policy?
They make it difficult to apply effective policies
Lags can result in missed opportunities for timely intervention.
What is the stance of laissez-faire economists regarding new policies?
They believe the economy will self-adjust quickly and may oppose interventionist policies
This perspective is based on the belief in the efficiency of market self-regulation.
