CHAPTER 5. Monetary Theory and Policy. CHAPTER 5 OVERVIEW. This chapter will: A. Describe the impact of monetary policy B. Explain the tradeoffs involved in monetary policy C. Describe how financial market participants monitor and forecast the Fed’s policies. A. Impact of Monetary Policy.
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Monetary Theory and Policy
This chapter will:
A. Describe the impact of monetary policy
B. Explain the tradeoffs involved in monetary policy
C. Describe how financial market participants monitor and forecast the Fed’s policies
1. Correcting a Weak Economy
a. Fed can stimulate the economy by creating a loose-money policy and engages in
1.) buying government securities
2.) lowering the lending rate
3.) lowering the reserve requirement
2. Correcting High Inflation
a. The Fed can constrain economic activity when it creates a tight-money policy and
1.) sells government securities
2.) raises the lending rate
3.) increases the reserve requirement
1. The Tradeoff
a. Studies indicate there exists an inverse relationship between inflation and unemployment
2. When inflation is high, tight money policy is considered.
Tradeoff is higher unemployment
3. When unemployment is high, loose-money policy is considered.
Trade off is higher inflation
1. Economic Indicators Monitored by the Fed
a. Indicators of Economic Growth
2.) Industrial production index
3.) Unemployment rate
4.) Consumer confidence surveys
b. Index of Leading, Coincident, and Lagging Indicators
2. Indicators of Inflation
a. Producer and Consumer Price Indexes
b. Other Indicators