Concepts
- Monetary Policy (Central Bank Policy)
- Expansionary Monetary Policy (Loose Monetary Policy)
- Contractionary Monetary Policy (Tight Monetary Policy)
- Tools of Monetary Policy
- Reserve Requirement
- Interest Rates (Discount Rate vs. Federal Funds Rate)
- Open-Market Operations (Buying/Selling Bonds)
- Impact on Money Supply
- Impact on Interest Rates (and Investment/Business Spending)
- Price of Bonds
- Hyperinflation
Overview
Monetary Policy represents what the Federal Reserve can do to change the money supply. If economists fear recession, the FED will implement expansionary monetary policy to stimulate economic activity. If economists fear inflation, the FED will implement contractionary monetary policy to slow down the economy. There are three tools of monetary policy that the FED has at their disposal. They can change the reserve requirement, change the discount rate, and/or conduct open market operations (buy/sell bonds). When the FED uses these tools, they are trying to move the money supply in a certain direction based on what they believe the economy needs. This change in the money supply has a huge impact on interest rates, which in turn, has a big impact on how much money businesses spend (investment spending). We will also observe that bond prices have an inverse relationship with interest rates and we will learn that dramatic increases in the money supply lead to hyperinflation.
Materials
Lecture
Video Coming at Later Date
Quiz
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