Activity 40.ppt

Activity 40 Monetary Policy 1. What is monetary policy? 1. What is monetary policy? Central bank activities to Promote growth Stabilize prices Maximize employment Moderate long-term interest rates Actions by the Fed to increase or decrease the money supply, to influence the economy 2. From 1998 to 2002, what was the dominant focus of monetary policy and why? 2. From 1998 to 2002, what was the dominant focus of monetary policy and why? From 1998 to 2001, the Fed wanted to slow growth to prevent inflation From 2001on the Fed wanted to stimulate growth without stimulating inflation 3. Explain why the money supply and short-term interest rates are inversely related. 3. Explain why the money supply and short-term interest rates are inversely related. Money supply is money supply, regardless of the interest rate; it is perfectly inelastic because it is controlled by the Fed. However changes in the money supply and short-term (nominal interest rates) are inversely related When the Fed buys securities (to increase the money supply) banks have more checkable deposits and therefore more reserves. Banks lower rates to entice more customers Easy money policy lowers the nominal interest rate When the Fed sells securities (to decrease the money supply) banks have fewer checkable deposits and therefore fewer reserves. Banks raise rates because they have fewer customers Tight money policy raises the nominal interest rate 4. What are some reasons for lags and imperfections in data used by central banks? 4. What are some reasons for lags and imperfections in data used by central banks? Financial institutions report at specified times (ie; quarterly to stockholders) and this may not be when the Fed may necessarily needs the information most. The central bank collects data from samples and extrapolates, errors can be in the data 5. Why do many economists believe that central banks have more control over the price level than over real output? 5. Why do many economists believe that ce