Monetary Policy 1 (the basics)

Monetary Policy

Managing the economy by altering the supply of money

Who conducts monetary policy?

The Fed

What's another name for "the Fed"?

"The Federal Reserve" or "Central Bank of the US"

What does EXPANSIONARY monetary policy do?

Increases the supply of money

What does CONTRACTIONARY monetary policy do?

Decreases the supply of money

When do we need expansionary monetary policy?

During an economic downturn

When do we need contractionary monetary policy?

When the economy is in danger of overheating

Another word for "contractionary monetary policy" is...

"tight money policy"

Another word for "expansionary monetary policy" is...

"loose money policy"

The money supply only expands when...

Banks make loans

Does the Fed print money to increase the money supply?

No. They have more sophisticated tools than that.

What are the 3 tools of monetary policy?

1. Open market operations

2. Changing the discount rate

3. Changing the required reserve ratio

What are Open Market Operations (OMO)?

The buying and selling of bonds by the Fed

What is the Discount Rate?

The interest charged by the Fed when it makes a short term loan to a commercial bank?

What is the Required Reserve Ratio

The portion of a deposit that a bank must keep on hand by law (e.g., 10%)

When a bank makes a loan, where does the money come from?

Excess Reserves

What are Excess Reserves?

The part of a deposit that is left over after the "Required Reserves" have been set aside.

What are the purpose of excess reserves?

1. Basis of loans

2. To cover withdrawals