Monetary and Fiscal Policy Flashcards
What is Fiscal policy as well as budget surplus/deficit?
Fiscal policy refers to governments use of spending and taxation to influence the economy. Balance when exp=rev, surplus when rev>exp, deficit when rev
What is monetary policy?
Change the money supply and credit in an economy. Expansionary - more money, more credit. Contractionary - reducing money, less credit. Both seek to maintain stable prices and economic growth.
What is the definition of money?
Generally accepted medium of exchange rather than directly. It is a unit of account that goods are expressed in. Stores of value - can be saved for later.
What is broad and narrow money?
Narrow money is the amount of notes and coin in circulation. Broad money includes narrow money and available liquid assets which can be used for purchases.
What is broad and narrow money?
Narrow money is the amount of notes and coin in circulation. Broad money includes narrow money and available liquid assets which can be used for purchases.
Describe the money creation process.
A portion of deposits can be loaned - amount kept is called a reserve. Loan money is received, and spent. These businesses can now deposit the money as well. Creates money in many multiples.
Total calculated by = Deposit/Reserve Req
Multiplier = 1 / Reserve req
What is demand of money? What are the three theories?
Amount of wealth that household and firms in an economy choose to hold in the form of money.
Transaction demand: money held to meet the need for undertaking transactions.
Precautionary demand - money held for unforeseen future needs.
Speculative demand - money that is available to take adage of investment.
At lower interest rates household hold more money.
What is demand of money? What are the three theories?
Amount of wealth that household and firms in an economy choose to hold in the form of money.
Transaction demand: money held to meet the need for undertaking transactions.
Precautionary demand - money held for unforeseen future needs.
Speculative demand - money that is available to take adage of investment.
At lower interest rates household hold more money.
What is the Fisher Effect?
states that the Nominal interest rate is simply the sum of the real rate and expected inflation.
Rnom=Rreal + E(I) + RP
What are the key roles of central banks?
Sole supplier of currency. Used to be backed by gold, now legal tender - called a fiat currency - as long as it holds value and can be used, it is a medium of exchange.
Banker to the government and other banks
Regulator and Supervisor of payments system. In many countries central bank regulate the system by imposing standards of risk taking.
Lender of Last Resort - Can print money if really needed.
Holder of Gold and foreign reserves.
Conductor of Monetary policy.
What is the key objective of a central bank?
To control inflation and promote price stability. Inflation leads to menu costs - the cost of always having to change prices. and Shoe leather costs - cost to individuals to making frequent trip to the banks.
Other goals: Stability in exchange, full employment, positive economic growth, moderate long term interest rates.
What are the three main tools of monetary policy?
Policy rate: Banks borrow funds from the fed to cover temp shortfalls in reserves.
Reserve requirements: increases req will reduce money available for lending or vice versa, and increases rates.
What are the three main tools of monetary policy?
Policy rate: Banks borrow funds from the fed to cover temp shortfalls in reserves.
Reserve requirements: increases req will reduce money available for lending or vice versa, and increases rates.
Open Market Operations: Buys securities, cash replaces securities, banks have excess reserves, more funds are available, money supply increases and interest rates decrease.
What are the three main tools of monetary policy?
Policy rate: Banks borrow funds from the fed to cover temp shortfalls in reserves.
Reserve requirements: increases req will reduce money available for lending or vice versa, and increases rates.
Open Market Operations: Buys securities, cash replaces securities, banks have excess reserves, more funds are available, money supply increases and interest rates decrease.
What are the three main QUALITIES of a central bank?
Independence: free from political interference. Operational independence means that the central bank is allowed to determine the policy rate. Target independence calculate inflation, sets target and determines horizon.
Credibility: Should follow through. Becomes self-fulfilling.
Transparency: periodically discloses state of the economic environments through inflation reports.
