UNIT 12: MONETARY POLICY Flashcards
How many main ideas are there in Unit 12?
I will summarize Unit 12. Unit 12 is about monetary policy. In my opinion, there are 3 main ideas:
*1. Firstly, it talks about OBJECTIVES (goals) of MP:
*2. Secondly, it talks about the QUANTITATIVE TOOLS OF MP:
- CHANGING THE RESERVE REQUIREMENT:
- CHANGING THE DISCOUNT RATE:
- OPEN MARKET OPERATIONS:
*3. Thirdly, it talks about 2 TYPES OF MP:
- EXPANSIONARY MP:
- RESTRICTIVE MP:
What are the objectives (or goals) of monetary policy?
- price stability
- Exchange stability
- full employment and maximum output
- Economic growth.
how many quantitative tools of Monetary Policy are there?
(=What are three quantitative tools of monetary policy?)
there are 3 quantitive tools:
- changing the reserve requirement
- changing the Discount rate
- Open market operations.
what is the monetary policy?
Monetary policy is a government policy related to a nation’s money supply by each country’s central bank.
what is called reserve requirement?
-is the percentage the Fed sets as the minimum amount of reserves a bank must have.
How does the Fed control the percentage of deposits banks keep in reserve?
by controlling the reserve requirement of all US banks.
How does the reserve requirement affect the money supply?
When the Fed increases RESERVE REQUIREMENT, it decreases the money supply and vice versa.
what determines the amount banks hold as reserves?
the Fed requirements
what is the central role of the reserve requirements? Why?
- the reserve requirements play a central role in how much money banks have to lend out.
- Because the amount most banks need for safety is much smaller than what the Fed requires, it’s the Fed’s Reserve requirement that determines the amount they hold as reserves.
what is the second tool of MP?
CHANGING THE DISCOUNT RATE: -is the rate of interest the Fed charges for loans
what is the discount rate?
is the rate of interest the Fed charges for loans.
How does the discount rate affect the money supply?
.
When the Fed increases the Discount rate, it contracts the money supply and vice versa
what does “open market operation” mean?
(=what is OPEN MARKET OPERATION?)
OPEN MARKET OPERATION is the government’s buying and selling governments securities/ treasury bonds.
How does open market operation affect the money supply?
when the Fed sells Treasury bonds, it decreases the money supply and vice versa.
What is a primary tool of monetary policy?
It’s open market operation.
Because:
- changes in discount rate and reserve requirement are not used in day-to-day fed operation.
- They are used mainly for major changes.
=> for day-to-day Fed operations, the fed uses open market operation.
how can the central bank shift aggregate demand?
by making more or less money available
When does the aggregate demand curve shift to the right/ left?
When there is an increase/decrease in the money supply.
What are two types of monetary policy?
how can the banks encourage people to borrow and spend more money?
They can encourage people by offering lower interest rates or easier approvals.
When will prices begin rising?
Prices will start rising when market participants bid against each other for increasing scarce goods.
How the central bank can reduce the money supply?
by raising reserve requirement, increasing the discount rate, and selling bonds in the open market.
What is the relationship between monetary policy and fiscal policy?
They are interdependent and complement one another because there are many overlapping issues between two policies
What are the differences between expansionary and restrictive monetary policy?
when might the central bank want to reduce money supply?
when the economy is overheating.
