Monetary Policy

• Economie
• Tertiary Education

Question

What is open market operation?

Answer here

Chapter 16.1: Monetary Policy

Pages 490-497

Objectives

Identify the key terms

Analyze the Fed's monetary tools

Discuss the effect of expansionary and contractionary policies

​The federal funds
rate (FFR) is the  interest rate that banks  

charge one another to
borrow money.​

Open market
operations are the  sales and purchase of  

federal government
securities.

The discount rate is
the interest rate that the  Fed charges when it lends  money to other banks.​

​The prime rate is 
the interest rate that  banks charge their best  

customers.​

the interest rate that

banks charge their best

customers.​

the interest rate that the Fed charges when it lends money to other banks.​

 the interest rate that banks charge one another to borrow money.​

Federal Fund Reserve

Discount rate

Prime rate

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

What is the relationship between the discount
rate and the prime rate?

Answer

 (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.)

1.How should a contractionary monetary policy affect interest rates
and the rate of inflation? Why?

2.How should an expansionary monetary policy affect interest rates 
and the unemployment rate? Why?

3.How does the Fed use open market operations as a monetary policy

tool?

Answer here

Answer

1. Interest rates will rise, inflation rate will fall.

Higher interest rates discourage lending, which

will decrease aggregate demand, slow GDP

growth, and lower general price level.​

2.Interest rates will fall, unemployment will fall.

Lower interest rates encourage lending, which

will increase spending and investment, increase

aggregate demand, and speed GDP growth.​

3.By buying and selling government securities the

Fed affects the amount of reserves in the bank​ing system, which in turn determines whether
the money supply will expand or contract

___________________ is a plan to increase the amount of money in
circulation.

1. Tight money
2. Expansionary monetary policy
3. Monetary policy
4. Contractionary monetary policy

Write the main points of the lesson.