Econ Unit 10 Review

These flashcards cover key concepts of monetary policy, including types, mechanisms, and historical context.

What is monetary policy?

Changing the money supply to change interest rates.

Who conducts monetary policy in the United States?

The Fed.

What is expansionary policy?

Increasing money supply, lowering interest rates, increased spending, AD shift right, and increases in GDP and PL.

What is contractionary policy?

Decreasing money supply, raises interest rates, decreased spending, AD shifts left, and decrease in GDP and PL.

When is expansionary policy used?

During a recessionary gap.

When is contractionary policy used?

During an inflationary gap.

What characterizes a limited reserves environment?

Buying bonds (OMO), lowering discount rate, lowering required reserve ratio.

What characterizes an ample reserves environment?

Raising interest rates on reserves.

When did the transition from a limited reserves environment to an ample reserves environment occur?

2008.

What is the required reserve ratio?

The percentage of reserves banks have to keep in their vault.

What is the discount rate?

The interest rate charged by the Fed in order to borrow money from them.

What are open market operations?

The Fed's buying/selling of government securities to change the money supply.

What is interest on reserves?

Fed pays banks interest on reserves balances held at the Fed.

How does interest on reserves function in an expansionary manner?

Decreasing IOR encourages banks to lend more and decreases the federal funds rate.

How does interest on reserves function in a contractionary manner?

Increases IOR to slow the economy and curb inflation.

How is the discount rate used in an expansionary manner?

Lowering the DR increases the money supply.

How is the discount rate used in a contractionary manner?

Raising the DR decreases the money supply.

What is the effect of open market operations in an expansionary manner?

Buying bonds increases money supply and lowers interest rates.

What is the effect of open market operations in a contractionary manner?

Selling bonds decreases money supply and raises interest rates.

How is the required reserve ratio used in an expansionary manner?

Lowers RRR which increases money multiplier and increases money supply.

How is the required reserve ratio used in a contractionary manner?

Raises RRR which decreases money multiplier and decreases money supply.

What is the federal funds rate?

Interest rate banks charge each other to borrow money.

Why does the discount rate act as an upper limit on the federal funds rate?

Banks will always be able to borrow from the Fed with the discount rate.

Why does the interest rate on reserves act as a lower limit on the federal funds rate?

No bank will lend at a rate lower than the IOR rate.

Who is the current Fed Chair?

Jerome Powell.

Who are some former Fed Chairs?

Alan Greenspan, Ben Bernanke, and Janet Yellen.

What is the Fed’s “dual mandate”?

Feds goals of maximum employment and stable prices.