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ch 13 econ

QuestionAnswer
countercyclical policies attempt to reduce the intensity of economic fluctuations and smooth the growth rate of employment, GDP and prices.
expansionary policy aims to reduce the severity of an economic recession by shifting labor demand to the right and expanding economic activity GDP
contractionary policy used to slow down the economy when it grows too fast or "overheats"
countercyclical monetary policy conducted by the central bank. In the U.S., that is the federal reserve, or fed. Primary tool is the federal funds rate
interest on reserve balances how the fed influences federal funds rate
FFR fed sets, which is where federal funds transactions take place range is 25 basis points, or 0.25%, wide.
total reserves held at fed fluctuate between $40-$80 billion
policy implementation tools for the fed (4) interest on reserve balances (IORB rate), overnight reserve repurchase agreement facility (ON RRP rate), discount window (discount rate), open market operations.
interest on reserve balances (IORB rate) the interest rate that banks earn from the Fed on the funds they deposit in their reserve balance accounts. IORB rate steers the federal funds rate into the FOMC's target range.
what interest on reserve balances (IORB rate) relies on (2) reservation rate, arbitrage
reservation rate the lowest rate that banks are likely willing to accept for lending out their funds.
arbitrage the simultaneous purchase and sale of funds (or goods) in order to profit from a difference in price
overnight reserve repurchase agreement facility (ON RRP rate) More common for financial institutions to participate in. Administered rate for a large number of financial institutions. sets floor on the FFR
discount window lending interest rate on loans the Fed makes to banks. lending reserves to banks so they can meet depositor's demands or reserve requirements. interest rate on this borrowing called discount rate.
discount rate administered rate set above FOMC's target range with intent to serve as a ceiling for the FFR
Open market Operations conducted periodically to maintain ample reserves. to shift supply curve right, Fed purchases securities and pays for them by adding reserves to the banking system.
expansionary monetary policy lowers short term interest rates to increase economic activity
liquidity trap when central bank pushes policy rate to the "zero lower bound"
quantitative easing occurs when the Fed buys long term bonds. This simultaneously increases the supply of bank reserves and pushed the price of the long term bonds up, which lowers their interest rate. coupon the bond pays is constant.
Taylor rule rule for stimulating the economy during recession to not risk inflation. 2 parts
taylor rule part 1 says the Fed raises the FFR 1.5% points for each 1% increase in the inflation rate.
taylor rule part 2 says the Fed raises FFR 0.5% points for each 1% increase in the output gap
countercyclical fiscal policy passed first by legislative branch (congress) and then signed into law by executive branch (president)
discretionary countercyclical components aspects of fiscal policy that policymakers deliberately enact in response to economic fluctuations
government expenditure multiplier change in GDP resulting from a $1 change in government expenditures. Higher government spending leads to higher demand for goods and services. Firms respond by increasing production, shifting demand for labor right with usual multiplier effects.
crowding out occurs when rising government expenditures partially or even fully displace expenditures by households and firms.
expenditure based fiscal policy critics of this emphasize crowding out and believe that the government expenditure multiplier is well below 1 and may even be close to zero.
Created by: user-1742075
 

 



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