The monetary policy

• Economie

Chapter 16

Section3: The Monetary Policy

Pages 490-497

Objectives

Identify the Fed’s tools for monetary policies.

Summarize the tools of Fed for the monetary policy

Discuss the approaches taken by Fed to promote growth and stability

Monetary Policy: involves Federal Reserve actions that change the money supply in order to influence the economy. 

Open Market Operations:are the sales and purchase of marketable federal government securities. This is the monetary policy tool most used by the Fed to adjust the  money supply. 

Federal Fund Rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.

 There are three actions the Fed can take to manage the supply of money: open market operations, adjusting the reserve requirement, and   adjusting the discount rate. They may be taken individually or in combination with  one another.

What is the sales and purchase of marketable federal government securities?

1. Monetary Policy
2. Fiscal Policy
3. Federal fund reserve
4. Open Market Operations

What is the difference between discount rate and prime rate?

(The prime rate tends to rise and fall as the discount rate does,

because banks charge their customers more than it costs them to borrow money from the Fed.)

When does the FFR rise?

1. The Fed buys bonds
2. The Fed creates stability
3. The Fed creates growth
4. The Fed sells bonds

Why is it inaccurate to say that the Fed sets
the federal funds rate?

(because the Fed does not set the rate directly but influences it

through open market operations)

​The most important job of the Fed is to promote growth and stability in the American economy. The purpose of monetary policy is to curb inflation and reduce economic stagnation or recession. By focusing on these goals, the Fed tries to promote

full employment and growth without rapid increases in prices or high interest rates.

Expansionary Policy is a plan to increase the amount of money in circulation. Contractionary monetary policy is a plan to reduce the amount of money  in circulation. When the economy slows, the Fed uses expansionary monetary policy  to pump more money into the economy. When the economy is overheated, the Fed  uses a contractionary policy to reduce the amount of money in the economy.

Which monetary policy is used when is more money less in circulation?

1. Aggregate demand policy
2. Contractionary Monetary policy
3. Expansionary monetary policy
4. Demand side policies

Which open market action would be
used to fight inflation?

Sells Bonds

Decreases it

How would the Fed change the discount
rate to fight recession?

Give the important points of the lesson.