Reading 18: Monetary & Fiscal Policy

Question 1

Compare monetary and fiscal policy.

Answer 1

Monetary Policy- policies created by the bank.
Ex: setting interest rates, open market operations, bank reserve ratio requirements

Fiscal Policy- fiscal policy is set by the government to cover the GDP including things like FISCAL BUDGETING. (GOVT SPENDING, TAXATION)

Question 2

Describe the functions of money.

Answer 2

Functions of money include:

1. ) store of value
2. ) unit of account
3. ) medium of exchange

Question 3

Explain the money creation process.

Answer 3

1. ) You lend the government $1000 & the federal reserve gave you a $1000 T-Bill
2. ) Federal reserve has a liability now and so they print $1000
3. ) Since, they printed $1000, they want to create more money by lending their money to banks underneath them for a rate.
4. ) As a result there the end-party is the business owner who has to carry the burden of creating 10x the initial printed amount.
5. ) That money is recreated and paid back to each of the banks overtime.

**$1,000–> $10,000 because of that T-bill

Question 4

Describe roles and objectives of central bank.

Answer 4

1. ) Control and distribution of currency to other banks
2. ) sole supplier of currency
3. ) Holder of gold & other foreign exchange reserves
4. ) conductor of monetary policy that will matriculate into other banks

Question 5

Describe qualities of effective central banks (TIC)

Answer 5

transparency,
Independence,
credibility

Question 6

Determine whether a monetary policy is contractionary or expansionary.

Answer 6

Monetary Policy is considered contractionary when the bank interest rate is set below neutral rates because less people will save in banks.

Monetary policy is considered expansionary when interest rates at banks are high because it is above neutral rates and because of that more people will SAVE in banks.

THINK OF I-S CURVE

Question 7

Describe the arguments on whether the size of national debt relative GDP Matters.

Answer 7

G-T = national debt;

Country’s Debt Ratio= aggregate debt/ GDP

Aggregate Debt= G-T= (S-I)-(X-M)

*****Looking at the Debt RATIO : GDP, we can tell the “HEALTH OF THE ECONOMY/BUSINESS”

EX: 75%, 25%, 10%

**which debt- GDP ratio is best? 10% because only 10% of all GDP is equal to that countries DEBT!**

What are some problems with Fiscal Debt?

1.) Leads to Devaluation of Money (Hyperinflation?)

Process: debt goes up -> taxes goes up (g-t) -> businesses will shutdown, employees lose incentive to work -> decrease in GDP

Question 8

Determine whether a fiscal policy is contractionary or expansionary.

Answer 8

Contractionary Fiscal Policy- aims to decrease GDP

Expansionary Fiscal Policy- aims to increase GDP