Chapter 13 Countcercyclical Policies in fluctuations

Countercyclical policies

Attempt to reduce the intensity of economic fluctuations and smooth the growth rate of employment, GDP and prices

Expansionary policy

Aims to reduce the severity of an economic recession by shifting labor demanded to the right and expanding economic activity. Uses higher government expenditure and lower taxes

Contractionary policy

Used to slow down the economy when it grows too fast. Can reduce inflation by slowing the rate of money supply, uses lower government expenditure and higher taxes

Discretionary Countercyclical compnonents

Aspects of fiscal policy that policymakers deliberately enact in response to economic fluctuations

Countercyclical monetary policy

It’s the primary tool of monetary policy is the fed’s control of the federal funds rate. Conducted by the central bank, in the US that is the federal reserve.

Interest on Reserve Balances

Interest rate that fed’s pay to banks???

Open market sale

Increases federal funds rate

Open market purchase

Reduces federal funds rate

Ample reserves framework

Interest on reserve balances

Primary tool where the lowest, yet still acceptable interest rate is acceptable to be deposited in reserve bank accounts. No one will take a lower interest rate than the federal reserve bank.

Overnight reverse repurchase agreement facility

Administrative rate that acts like a reservation rate for a large number of financial institutions. rate sets a floor on the federal funds rate. Safer as it offers a lower interest rate

Arbitrage

The simultaneous purchase and sale of funds or goods in order to profit from a difference in price

Discount window

Interest rate on loans the fed makes to banks. Lending reserves to banks can meet depositors demands or reserve requirements. Acting as a lender helps reduce damage to the economy. Helps with liquidity problems and people who seek immediate cash

Open market operations

Conducted periodically to maintain ample reserves. To shift supply curve to right. Fed purchases securities and pays for them by adding reserves to the banking system.

Zero lower bound

Quantitative Easing

Fed comes into market and starts buying bond to right shift to right which increases demand and price of bond which decreases the yield and longer term interest rates on the bond