AP Macro Unit 4

If the Fed lowers the Reserve Ratio, what will the effect on I_g  be?

Lowering Reserve Ratio → Increases Ig (Investment Goods) because banks can lend more.

If the Fed buys bonds, what will the impact be on Real GDP?

Buying bonds → Increases Real GDP (boosts aggregate demand).

If the Fed wants to lower unemployment, what action should they take with the discount rate?

Lowering discount rate → Reduces unemployment (stimulates borrowing).

What open-market operation should the Federal Reserve use if they want to fight inflation?

Selling bonds → Fights inflation (reduces money supply).

To slow the growth of aggregate demand, should the Fed buy or sell bonds?

Selling bonds → Slows aggregate demand growth.

The Fed wants to decrease the Fed Funds rate. Are they more concerned with boosting GDP or slowing inflation?  What open-market operation should they use?

Lowering Fed Funds rate → Boosts GDP (expansionary monetary policy), buys bonds.

If the Fed is using “tight” monetary policy what did they do with the Reserve Ratio?

Tight monetary policy → Increases Reserve Ratio

What impact will selling bonds have on the Price Level in the short run?

Selling bonds → Decreases Price Level (short-run)

What action should the Fed take with the discount rate if they want banks to make fewer loans?

Raising discount rate → Reduces bank lending.

If the Fed wants “easy” money, what open-market operation should the Fed implement?

Easy money → Buying bonds