Government Chapter 20.2 Monetary Policy

General Economics competition 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 Economics Demand 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 Economics Scarcity The condition of rarity for a particular product. It generally means higher prices if demand remains high. interest rates The amount of money charged by lenders for loans. ***These go up or down depending on the money supply.

Mixed Market capitalism mixed 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 year A high GDP indicates a wealthy country with a strong economy A low GDP indicates a poor country with a weak economy

Economic Indicators Inflation the economic trend when prices go up and the value of money decreases. Caused by an increase to the money supply Republicans are more concerned with this. Consumer Price Index (CPI) the key measure of inflation that relates the rise in prices over time

Economic Indicators Unemployment 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 system Federal 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 system Board 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 system Janet Yellen the current chairman of the Fed Ben Bernanke the former chairman of the Fed Alan Greenspan Chairman of the Fed before Ben Bernanke

Money Supply decreasing the money supply could lessen inflation by lowering prices The risk of increasing unemployment exists Increasing the money supply Generally leads to increased investment Generally leads to lower unemployment could cause inflation by raising prices

Tools of the Fed Discount 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 Fed Reserve 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 Fed open market operations the act of "the Fed" buying bonds and securities Buying bonds increases the money supply because the fed pays money into the economy Selling bonds decreases the money supply because private business in the economy pays money to the fed, taking money out of circulation

Expansionary policy The government's attempt to stimulate a mixed market economy to encourage growth. Increase available money Fiscal tools would include: lowering taxes increasing spending monetary tools would include: Buying bonds decreasing the reserve requirement decreasing the discount rate

Contractionary policy The 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