Types of Monetary policy

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  • Created by: aloo gobi
  • Created on: 27-02-14 10:26
Simply stated, monetary policy is carried out by the Fed to change the money supply. When the Fed increases the money supply, the policy is called expansionary.
When the Fed decreases the money supply, the policy is called contractionary. These policies, like fiscal policy, can be used to control the economy. Under expansionary monetary policy the economy expands and output increases
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Under contractionary monetary policy the economy shrinks and output decreases. Let's investigate how the Fed affects the money supply.
There are three basic ways that the Fed can affect the money supply. The first is through open market operations. The second is by changing the reserve requirement
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The third is through changing the federal funds interest rate. Each of these actions in some way affects the total amount of currency or deposits available to the public.
Open market operations are the sale and purchase of government bonds issued and regulated by the Fed.
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When the Fed sells government bonds, the public exchanges currency for bonds, resulting in a shrinking of the money supply. When the Fed purchases government bonds, the Fed exchanges currency for bonds, thus resulting in an increase in the money supp
Open market operations are the most common tool that the Fed uses to affect the money supply. In fact, almost every weekday government bonds are bought and sold in New York City.
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The second way that the Fed can influence the money supply is through changing the reserve requirements. We learned in the SparkNote on the purpose of banks that the money multiplier shows how much an initial deposit increases the money supply after
Recall that the money multiplier is one over the reserve requirement. Thus, if the reserve requirement is decreased, banks are required to hold fewer reserves and can then make more loans.
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Other cards in this set

Card 2

Front

Under contractionary monetary policy the economy shrinks and output decreases. Let's investigate how the Fed affects the money supply.

Back

There are three basic ways that the Fed can affect the money supply. The first is through open market operations. The second is by changing the reserve requirement

Card 3

Front

The third is through changing the federal funds interest rate. Each of these actions in some way affects the total amount of currency or deposits available to the public.

Back

Preview of the front of card 3

Card 4

Front

When the Fed sells government bonds, the public exchanges currency for bonds, resulting in a shrinking of the money supply. When the Fed purchases government bonds, the Fed exchanges currency for bonds, thus resulting in an increase in the money supp

Back

Preview of the front of card 4

Card 5

Front

The second way that the Fed can influence the money supply is through changing the reserve requirements. We learned in the SparkNote on the purpose of banks that the money multiplier shows how much an initial deposit increases the money supply after

Back

Preview of the front of card 5

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