Ch 17 - Monetary Policy

Expansionary Monetary policy

is increasing the money supply to promote maximum employment and remedy a recession.

Contractionary Monetary policy

is decreasing the money supply to lower the price level and remedy inflation.

Liquidity Trap

When interest rates are near zero.

SRAS

Workers and resource owners demand higher wages and prices which induces firms to lower production, and shifts ________ to the left.

During inflationary times

a decrease in the money supply is warranted.

recessionary gap

occurs when a country’s real GDP is lower than its GDP at full employment, which is the distance between LRAS and price level.

Monetary Policy

are changes in the money supply to fight recessions or inflations.

money supply

An increase in the ________ promotes maximum employment and can remedy a recession.

Federal Funds Rate

the interest rate on short- term loans between depository institutions.

Expansionary monetary policy

promotes full employment during a recession but causes inflation.

contractionary Monetary policy

ends up closing inflationary gap.

money supply

The fed decreases ________, which raises interest rates.

Expansionary monetary policy

can be applied during a recession rather than waiting for wages and input prices to fall in the long run.

Contractionary monetary policy

will fight the inflation caused by expansionary monetary policy, which causes real GDP to decrease and that means more unemployment.

money supply

will affect the macroeconomy through interest rates.

Expansionary monetary policy

When ________ aims to close the recessionary gap, the prices will increase along the price level, while incomes increase proportionally in the long run.

Monetary Policy

are changes in the money supply to fight recessions or inflations

The Feds goals for monetary policy

* maximise employment
* keep the price level steady
* promote economic growth

Expansionary Monetary policy

is increasing the money supply to promote maximum employment and remedy a recession

Contractionary Monetary policy

is decreasing the money supply to lower the price level and remedy inflation

Inflationary gap

Is the difference between the current real GDP and the GDP of an economy operating at full employment

Federal Funds Rate

the interest rate on short-term loans between depository institutions

Liquidity Trap

When interest rates are near zero