Fiscal and Monetary Policy Quiz

What is a discount rate?

- Interest rate - Rate at which the Fed lends money to banks

What is the fiscal policy when their is inflation? Is this contractionary or expansionary?

- Raise taxes - Lower government spending (decrease the amount of money in the economy) - Contractionary

What are the three important tools the Fed has to regulate the nation's money supply?

- Reserve requirements - Discount rate - Buying/selling bonds

What is the fiscal policy when their is a recession? Is this contractionary or expansionary?

- Unemployment is high - Lower taxes - Increase government spending (trying to stimulate the economy) - Expansionary

What are bonds?

Loans to a government or business which are paid back (by that govt. or business) which interest

What happens to the discount rate in a rapidly growing economy?

The Fed raises the discount rate (raises the interest rate banks will charge customers, decreases how much consumers borrow and spend)

What happens to bonds in a rapidly growing economy?

The Fed's Open Market Committee decides to sell governments bonds to take money out of banks, decrease the money supply

During economic upswings, is the monetary policy contractionary or expansionary?

- Contractionary - Usually business profits rise and unemployment drops (this causes rising prices and inflation) - Therefore, the goal is to decrease the money supply

What did the 1913 Federal Reserve Act do?

- Created the Federal Reserve ("The Fed") to serve as the "banks bank" - The Fed regulates the amount of money the banks lend

Shortcomings of fiscal policy?

- Does not produce instant results and economic conditions change - Expansionary may lead to too much inflation - Contractionary may bring about recession - Hard to coordinate federal and state policy - Political pressure (expansionary = more popular)

During economic downturns, is the monetary policy contractionary or expansionary?

- Expansionary - Goal is to increase the money supply

What is the goal of a contractionary fiscal policy?

- Slow economic growth - Government shrinks the economy - When inflation is growing and prices are getting too high - Decrease spending, increase taxes - Reduced consumer demand leads to lower prices

What is the goal of an expansionary fiscal policy?

- Stimulate the economy and create growth - increase spending, decrease taxes

What are the 2 key words for fiscal policy?

- Taxing - Spending

What happens to the reserve requirements when there is a weak economy?

Lower reserve requirement (allows banks to lend more, increase money supply, and stimulate the economy)

What happens to the discount rate in a weak economy?

Lowers the discount rate (lowers in the interest rate banks will charge consumers, will increase how much consumers borrow and spend)

What happens to the reserve requirements when there is a rapidly growing economy?

Raises reserve requirement (restricts lending, decreases money supply)

What happens to bonds in a weak economy?

The Fed's Open Market Committee decides to buy bonds which puts money back to loan to consumers, increases money supply

What is a reserve requirement?

The amount the Fed requires banks to keep in reserve at the Fed

What is fiscal policy?

The federal gov. can influence the economy by its spending, taxing, and borrowing of local, state, and federal gov.

What is monetary policy?

The government's ability to control the nation's money supply