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ECON 202
Macroeconomics Final Exam: Chapter 15 Monetary Policy
Question | Answer |
---|---|
How does Monetary Policy affect AD? | By altering money supply and Interest rate |
What is the goal of Monetary Policy? | max. employment and price stability |
What is warranted during a recessionary gap caused by negative demand shock | expansionary monetary policy |
What are possible types of expansionary Monetary Policy? | Open market purchase, reduce discount rate, reduce required reserve rate |
What is warranted during a inflationary gap caused by positive demand shock | contractionary monetary policy |
What are possible types of expansionary Monetary Policy? | open market sale, increase discount rate, raise required reserve ratio |
Effect on SRAS curve under negative supply shock: | SRAS shift to left |
What would cause SRAS to shift to the left? | rising inflation, declining output, rising unemployment |
What type of monetary policy will bring down inflation? Why? | contractionary. Output is farther away from potential, push employment even higher |
What type of monetary policy will bring down unemployment? Why? | expansionary. price level is rising further |
what type of recession was from 1981-1982 | policy induced |
How is required reserve ratio as a monetary policy tool? | not very effective, can not be used on a daily basis |
How is discount rate as a monetary policy tool? | not used regularly, tied to decisions on open market operations |
How is open market operations as a monetary policy tool? | most important, most frequently used |
In an open market operation, what are the Assets and Liabilities of the Fed's balance sheet? | Assets- treasury securities, discount loans Liabilities- currency in circulation, bank reserves |
In an open market operation, what are the Assets and Liabilities of a Commercial Bank's balance sheet? | Assets- Reserves at Fed, Treasury Securities Liabilities- Deposits |
What two markets are affected simultaneously in an open market operation? | Treasury bill market, market for reserves at Fed. |
How is the market for reserves at the fed effected by open market operations? | banks borrow and lend among themselves to meet reserve needs |
Federal Funds Rate (FFR): | the interest rate that U.S. banks pay one another to borrow or loan money overnight |
What happens during open market purchase? | Fed Buying T-Bills |
What happens during open market sale? | Fed Selling T-Bills |
What happens to the T-bills market during open market purchase? | decrease demand for T-bills, increase price for T-bills, pushing Interest rate down |
What happens in market for reserves during open market purchase? | increases supply of reserves, push down FFR |
What happens to the T-bills market during open market sale? | increase supply of T-bills, Decrease price of T-bills, pushing interest rate up |
What happens in market for reserves during open market sale? | Decrease supply of Reserves, Push up FFR |
Broader impacts of FFR (3) | important benchmark for short-term interest rates, affects yield of Treasury Securities and the stock market, discount rate is usually set about 1% higher than FFR |
What happens when FFR is cut down to 0 | conventional monetary policy becomes ineffective. (this happened after great recession) |
What are the 3 types of unconventional monetary policy? | quantitative easing, forward guidance, negative interest rate |
Quantitative Easing: | a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses. |
Forward Guidance: | the communication from a central bank about the state of the economy and the likely future course of monetary policy |
Negative Interest Rate: | used when strong signs of deflation, borrowers are credited interest instead of paying interest to lenders in a negative interest rate environment. |