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The document reviews key concepts for a monetary policy test, including: 1) It defines GDP, the three macroeconomic goals of economic growth, low unemployment, and stable prices. 2) It explains aggregate demand and supply curves, and expansionary and contractionary fiscal policy. 3) It outlines the purposes and characteristics of money, and the three main types: commodity, bank, and fiat. 4) It describes the structure and tools of the Federal Reserve, including controlling the discount rate, reserve requirement, and conducting open market operations.

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nia.mccrillis
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34 views

Study Guide

The document reviews key concepts for a monetary policy test, including: 1) It defines GDP, the three macroeconomic goals of economic growth, low unemployment, and stable prices. 2) It explains aggregate demand and supply curves, and expansionary and contractionary fiscal policy. 3) It outlines the purposes and characteristics of money, and the three main types: commodity, bank, and fiat. 4) It describes the structure and tools of the Federal Reserve, including controlling the discount rate, reserve requirement, and conducting open market operations.

Uploaded by

nia.mccrillis
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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REVIEW FOR MONETARY POLICY TEST

I. Old stuff needed to review


a. The measurement economists use to measure the national output of an economy is called GDP
where nominal GDP uses this year’s prices while Real GDP compares the output using a base
year.
b. The 3 broad macro goals include
i. economic growth
ii. low unemployment
iii. stable prices
c. Vocab
i. deficit-spending more than you are taking in (can be a governmental issue also, if the
government spends more than they collect in yearly revenue, they are running a yearly
deficit
ii. opportunity cost - what you sacrifice when you make a choice – the next best
alternative you could have received

II. Aggregate demand and aggregate supply


a. Aggregate demand is the sum of all demand for new goods and supply produced within a year by
consumption, investment, government spending, and net exports
b. The general slope of an AD curve is downward while an AS curve is upward or positive slope
c. When you engage in fiscal policy, you are either changing taxes or government spending
i. expansionary fiscal policy means the government will decrease taxes and increase
government spending
ii. contractionary fiscal policy means the government will increase taxes and
decrease government spending

III. What is money?


a. Money serves 3 important purposes, including as a medium of exchange, unit of value, and a
store of value.
b. Characteristics of good money include durability, portability, and divisibility.
c. The US money is known as fiat money (which is very difficult to pronounce, but thankfully this
is not a verbal test)
d. The three main types of money are commodity, bank, fiat with fiat being the most liquid (which
means closest to being cash)
i. commodity - includes agricultural products, physical goods
ii. bank - includes checks, debit cards, credit cards
iii. fiat - the largest which includes the US dollar

IV. The Federal Reserve


a. The basis for our national banking idea comes from the federal reserve system, which means that
banks only need to hold part of the cash we deposit, therefore allowing the bank to loan out the
rest, which allows people to borrow from the bank and expand or buy (which helps our economy
grow)
b. The Federal Reserve, is also known as the US central banking system and is an independent
agency
c. Structure of the FED
i. The FED is comprised of 12 National Banks and branches of member banks (the member
banks are the banks that we use). The member banks actually own stock in the Federal
Reserve system (similar to you and I with a corporation), so in theory, the member banks
own the Federal Reserve System
ii. The two main primary goals of the FED are to control the money supply and to
ensure that banks are engaging in safe and responsible banking procedures
iii. The FOMC is responsible for handling the open market operations, which is the
most effective way to influence the money supply

iv. The chairman of the FED is currently Jerome Powell and has served for 5 years
d. Tools of the fed
i. The three main tools of the FED include controlling the discount rate, reserve
requirement, and open market operations operations
ii. The discount rate is the rate at which commercial banks borrow from the Federal
Reserve, the lower the rate, the more likely the bank is to borrow money and take the
loan
iii. the reserve requirement is the amount required by the FED for banks to keep in a
combination of its vaults and the FED’s vault’s in the banks name. if the FED raises this
rate, this means the banks must keep more money in their vaults.
iv. the most common tool used by the FED is open market operations, which includes
buying and selling US Treasury securities (which are very similar to bonds)
1. when the FED OMS, cash is transferring from banks to the FED and the money
supply is getting smaller, which causes the discount rate to increase.
2. when the FED OMB, cash is transferring from the FED to the banks and the
money supply is getting bigger, which cause the discount rate to decrease

v. Complete this chart (using mainly arrows or increased / decreased)


Discount Rate Reserve Requirement Open Market Operation
Expansionary (also decrease decrease increase
known as loose )MP
Contractionary (also increase increase decrease
known as tight)MP

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