Unit 5 - Monetarism and the Fed

What is the bathtub model?

Shows the money supply in the in the economy.

What is the Philip Curve?

Theorizes that Unemployment and inflation have inverse relationships.

What is stagflation?

Persistently high unemployment and inflation at the same time

What are the three purposes of the Fed?

Functions as last lender of last resort

Conducts Monetary Policy with the goals of maintaining full unemployment and controlling Inflation

Regulated banking sector

What is the OFFICIAL stated goals of the fed?

Maximum employment, stable prices, and moderate long-term interest rates

What is Monetary Policy?

Action taken by a Central Bank in pursuit of macroeconomic goals.

What are the three tools of Monetary Policy?

Discount Rate

Reserve Requirement

Trading Securities

What are Discount Rates?

The interest rate at which the Fed lends to banks as the “Lender of Last Resort”

Fed decreases the discount rate, this makes borrowing from the fed less expensive, and the money supply increases

What is Reserve Requirements?

The amount of money that must be kept “On reserve” by a bank in a fractional reserve banking system

Lower the reserve requirements, more money will be created at each step of the fractional reserve system, which dramatically increases the money supply.

What is trade securiries?

Fed has option to buy or sell securities from banks.

If the Fed purchases securities from a bank, this introduces new money into the system and increases the money supply.

What are the 3 criticisms of Monetary Policy?

The Fed Prints money

Constant expansionary policies cause steady monetary inflation which devalues the money people have

Will produce unwanted outcomes that the cost outweigh the benefits.

What is Lag?

The time lost between an action and a reaction.