Government Chapter 20.2

Monetary Policy

General Economicscompetition

The existence of two or more companies within a single industry that are trying to attract the same customers.

It keeps prices low in a market economy.

Monopoly One company controlling all producers of a single

product. It eliminates competition poses the threat of higher prices.

General EconomicsDemand

the amount of a product consumers are willing to purchase.

It helps dictate price in a market economy. More demand generally means an increase in value Less Demand generally means a drop in value

Supply the amount of a product available for purchase It helps dictate price in a market economy. More of something generally means a drop in value Less of something generally means an increase in value

General EconomicsScarcity

The condition of rarity for a particular product. It generally means higher prices if demand

remains high.

interest ratesThe amount of money charged by lenders for

loans. ***These go up or down depending on the money

supply.

Mixed Market capitalismmixed market capitalism

Free competition among industry combined with government intervention in some areas

The U.S. is an example because of two policies:

Fiscal Policy How a government is involved in a mixed market economy

by controlling the TAXING and SPENDING to affect inflation and unemployment.

monetary policy How a government is involved in a mixed market economy

by controlling the MONEY SUPPLY to affect inflation and unemployment(dealings of the Fed)

Economic Indicators

GDP/GNP (Gross Domestic Product/Gross National Product)the sum of the value of all goods produced in a

country within a yearA high GDP indicates a wealthy country with a

strong economyA low GDP indicates a poor country with a weak

economy

Economic IndicatorsInflation

the economic trend when prices go up and the value of money decreases.

Caused by an increase to the money supplyRepublicans are more concerned with this.

Consumer Price Index (CPI) the key measure of inflation that relates the rise in prices

over time

Economic IndicatorsUnemployment Rate

the proportion of the labor force actively seeking work but unable to find jobs

Generally caused by a decrease to the money supply

Democrats are more concerned with this.Bureau of Labor and Statistics

the part of the federal bureaucracy that measures unemployment.

Federal reserve systemFederal Reserve Act

Act of Congress in 1913 that created and established the Federal Reserve System, the central banking system of the United States of

America granted it the legal authority to issue Federal

Reserve Notes.

Federal reserve systemBoard of Governors of the Federal Reserve

System ("the fed") independent agency in the Executive Branch in charge of controlling the money supply in order

to affect inflation and unemployment.

Federal reserve systemJanet Yellen

the current chairman of the Fed

Ben Bernankethe former chairman of the Fed

Alan GreenspanChairman of the Fed before Ben Bernanke

Money Supplydecreasing the money supply

could lessen inflation by lowering pricesThe risk of increasing unemployment exists

Increasing the money supplyGenerally leads to increased investmentGenerally leads to lower unemploymentcould cause inflation by raising prices

Tools of the FedDiscount Rate

What "the Fed" charges banks in an effort to control the money supply

Raising it causes interest rates to rise, which decreases the money supply

Lowering it causes interest rates to go down, which increases the money supply

Tools of the FedReserve requirement

When "the Fed” forces banks to leave a portion of their money out of circulation.

Increasing the reserve requirement lowers the money supply because banks have less cash on hand

Decreasing the reserve requirement raises the money supply because banks have more cash on hand

Tools of the Fedopen market operations

the act of "the Fed" buying bonds and securitiesBuying bonds increases the money supply because

the fed pays money into the economySelling bonds decreases the money supply

because private business in the economy pays money to the fed, taking money out of circulation

Expansionary policyThe government's attempt to stimulate a mixed

market economy to encourage growth. Increase available moneyFiscal tools would include:

lowering taxesincreasing spending

monetary tools would include: Buying bondsdecreasing the reserve requirement decreasing the discount rate

Contractionary policyThe government's attempt to slow down a mixed

market economy to discourage growth.Decrease available money Fiscal tools would include:

raising taxes decreasing spending

monetary tools would include: selling bonds increasing the reserve requirement increasing the discount rate