Business College

1. Explain the difference between the terms in each of these pairs.
a. monetary policy
monetarism
b. easy-money policy c. discount rate
tight-money policy prime rate
2. How should a contractionary monetary policy affect interest rates
and the rate of inflation? Why?
3. How should an expansionary monetary policy affect interest rates
and the unemployment rate? Why?
4. How does the Fed use open market operations as a monetary policy
tool?
5. What is the main short-term effect of monetary policy?

Answers

Answer 1

a. Monetary policy refers to actions taken by a central bank to regulate the supply of money and credit in an economy, while monetarism is an economic theory that emphasizes the importance of controlling the money supply as a means of stabilizing the economy.

What is  easy-money policy

b. An easy-money policy is a monetary policy that increases the money supply and lowers interest rates, while a tight-money policy is a monetary policy that decreases the money supply and raises interest rates.

The discount rate is the interest rate at which banks can borrow money from the central bank, while the prime rate is the interest rate that commercial banks charge their most creditworthy customers.

A contractionary monetary policy involves decreasing the money supply and raising interest rates in order to reduce inflationary pressures and slow down economic growth. This can be achieved by measures such as increasing the reserve requirements for banks, selling government securities, and raising the discount rate.

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