Monetary Policy Review

What is the primary goal of monetary policy?

control the money supply of the nation

Who is responsible for implementing monetary policy in the United States?

The Federal Reserve

What are the main goals of monetary policy?

maximize employment, stabilize profits, and economic growth

What do expansionary monetary policies do?

work to increase the money supply

What do contractionary monetary policies do?

work to decrease the money supply

How does lowering interest rates affect consumer spending?

Encourages people to take out loans from the bank since the interest rate is cheap. Makes people spend money which defeats recession.

What are open market operations, and how do they influence the money supply?

Describes when the government buys and sells bonds to increase or decrease the money supply.

How does the Federal Reserve use the discount rate to control the economy?

To encourage or discourage the bank from giving loans

What happens to the economy when the reserve requirement for banks is lowered?

A low reserve requirement causes the money supply increases which helps fight recession.

What effect does an increase in the money supply typically have on inflation?

Worsens the inflation because it increases economic activity

Why would a central bank implement a contractionary monetary policy?

to slow down the economic growth and to decrease inflation

What are the potential risks of maintaining low interest rates for an extended period?

Can encourage people to spend money and borrow loans which can lead to the potential risk of inflation

What role do government bonds play in open market operations?

when sold can take money out of the circulation and when bought places money back into the circulation

Who selects the board of governors of the Federal Reserve?

The President

What is inflation?

An increase in the average price level of all products in an economy

What is a recession?

A prolonged period of time where economic activity is low

If the Fed charges 3% to banks for lending them money, banks will charge customers at least how much?

At least 4% so the banks can make a profit

Why might the Fed want to increase the money supply in an economy? 

to fight against the recession

Why might the Fed want to decrease the money supply in an economy?

to fight against an inflation

What is the medium of exchange?

Anything that is used to determine value during the exchange of goods and services

What is the unit of account?

An agreed upon measure for stating the prices of goods and services

What is the store of value? 

An asset that maintains its value over time

I have $6,000 in deposits and the reserve Requirement is 15%. How much must I keep in my vault? How much can I lend out?

The bank must keep $900 dollars in the vault and can lend out $5,100.

• multiply the amount by the reserve requirement

• rest is kept by the bank