Ch. 14 - Fiscal Policy and Monetary Policy Tools
How is Required Reserve Ratio part of tight-money policy?
When the fed raises the reserve ratio, i.e., the banks have to keep more money in reserve, the banks have less money to loan and so less money is in the economy
How does the government enact Contractionary fiscal policy?
cutting government spending, increase taxes or both
What are the economic impacts of Contractionary fiscal policy?
decrease economic activity, less demand by buyers
What problems is the government trying to address with Contractionary fiscal policy
inflated prices, high demand for more goods by buyers then the economy can produce
How is Discount Rate used as part of tight-money policy?
By raising the discount rate banks borrow less from Feds so they have less money to loan and there's less money supply
How often does the Fed use Discount Rate? Why?
The Fed does not use this tool often because banks are more likely to borrow from other banks.
How is Discount Rate used as part of easy-money policy?
By lowering the discount rate it makes it easier for banks to borrow from the Fed putting more money in the economy
How is Required Reserve Ratio used as part of easy-money policy
By lowering the ratio reserve ratio banks need it frees the banks to make more loans creating more money in the economy
How is Open-Market Operations used as part of tight-money policy?
Fed sells government bonds which decreases the money supply in the market
What are two fiscal policies the Feds use?
Expansionary Fiscal Policy Contractionary Fiscal Policy
How does the government enact Expansionary fiscal policy?
Increasing government spending and/or cutting taxes
How often does the Fed us Required Reserve Ratio?
Least used tool - while a lower percentage might not be a problem (banks would have more money on hand to loan out), a higher ratio would leave the banks with less money to loan. The bank could borrow money but it would have to pay interest on the loan. Or, the bank could refuse to render loans as they come due.
What problems is the Government trying to address when it uses Expansionary Fiscal Policy?
Low employment, unstable prices, slow economic growth
list the three Monetary tools
Open-Market Operations Required Reserve Ratio Discount Rate
How is Open-Market Operations used as part of easy-money policy?
The fed buys government bonds which increases the money supply in the market
What are the economic impacts of Expansionary fiscal policy?
The goals of this policy is to increase economic activity
How often does the Fed use Open-Market Operations?
They use this tool the most because it's the easiest and they don't need new laws
