Monetary Policy 1

What is Monetary Policy?

The Fed's decisions regarding the money supply.

How does Monetary Policy affect GDP?

Monetary Policy seeks to minimize fluctuations in GDP by changing the money supply, which affects GDP.

What is the relationship between money supply and interest rates?

A decrease in the money supply leads to an increase in interest rates.

Define Expansionary Monetary Policy.

A policy that seeks to increase the money supply, reduce interest rates, boost investment, increase aggregate demand, and grow GDP.

Define Contractionary Monetary Policy.

A policy that seeks to decrease the money supply, increase interest rates, reduce investment, decrease aggregate demand, and slow GDP growth.

What is Open Market Operations?

The Fed’s practice of buying and selling U.S. Treasury bonds to influence the money supply.

What does the Reserve Ratio determine?

The fraction of deposits that banks must keep on hand as reserves.

What is the effect of decreasing reserve requirements?

Increases the money supply, lowers interest rates, and encourages more investment.

What is the effect of increasing reserve requirements?

Decreases the money supply, raises interest rates, and reduces investment.

What happens to investment when interest rates increase?

Investment generally decreases.