Unit 8

Question 1

Fiscal Policy vs Monetary Policy

Answer 1

Fiscal Policy is when the government’s use of taxation and spending influences the economy. Determined by the pres and congess

Monetary Policy is when ethe cental bank’s actions affec the quantity of money and credit in the economy.Determined by the Board of Governors and the Federal Reserve system.

Question 2

what are the major schools of economics and what is their most notable feature?

Answer 2

Keynesian - Lower taxation and more government spending
Classical - Lower taes and less governement regulation benefit consumers through a greater suppply of goods and services at a lower cost
Supply-side economics - supply creates demnd by providing jobs and wages. supply and demand pricing
Monetariest Theroy - quantity of money determines the overall price levels and econic activity.

Question 3

what are the primarytools that the FRB uses to affect money supply?

Answer 3

1. Changes in reserve requirements - when reerve requirements are raised banks have less money to lend. and vice versus (most drastic)
2. Changes in the discount rate - the rate the fed charges to banks when lending them money. higher rate discourages borrowing and reduces money supply. Set by the FED
3. Open-market operations - when the Fed buys and seels US Treasury securities in the open market as directed by FOMC. Whne tresuries are purchased, add to money supply and banks have greater reserves. This is the most active and common tool the Fed uses.

(FRB = Federal Reserve Board)

Question 4

Federal Fund rate is

Answer 4

the rate banks charge other banks for overnight loans of $1 million or more. Not set by the FED but considered a barometer for short-term interest rates.

Question 5

Prime Rate

Answer 5

• 1. Most preferencial rate given to coporate loans from the largest banks.
• 1. Each bank sets its own rate.
• 1. Banks lower their prime rates when the feds easy money supply.