Monetary Policy for Recession and Inflation
Easy Money Policy
Problem: Unemployment and Recession
Open Market Operations: Federal Reserve
buys bonds, lowers reserve ratio, or lowers
the discount rate
Reserve Ratio: Excess Reserves increase
Discount Rate: Fed Lowers the Discount Rate
Tight Money Policy
Problem: Inflation
Open Market Operations: Federal Reserve
sells bonds, increases reserve ratio, or
increases the discount rate
Reserve Ratio: Excess Reserves decrease
Money Supply Rises
Interest Rate Falls
Investment Spending Increases
Discount Rate: Fed Increases the Discount
Rate
Money Supply Falls
Interest Rate Rises
Investment Spending Decreases
Aggregate Demand Increases
Aggregate Demand Decreases
The Three Tools of the Federal Reserve:

Open Market Operations – Monetary policy in the form of U.S. Treasury bills or bond sales and
purchases, or both

Discount Rate - The interest rate that the Federal Reserve System charges on loans to the
nation’s financial institutions

Reserve Ratio – A formula used to compute the amount of a depository institutions required
reserves (The Federal Reserve requires that banks deposit a percentage of all checkable deposits
into the Federal Reserve to ensure that banks have plenty of cash)
Monetary Policy – Actions by the Federal Reserve System to expand or contract the money supply in
order to affect the cost and availability of credit
Tight Money Policy – Monetary policy resulting in higher interest rates and restricted access to credit;
associated with a contraction of the money supply.
Easy Money Policy – Monetary policy resulting in lower interest rates and greater access to credit;
associated with an expansion of the money supply.
The Federal Reserve System – Privately owned, publicly controlled, central back of bank of the United
States.
Time Deposit – Interest-bearing deposit requiring prior notice before a withdrawal can be made, even
though the rule may not always be enforced.
Federal Open Market Committee – Decides the monetary policy; consists of the 7 members of the
Board of Governors and 5 presidents of district banks.
Real Interest Rate – The market rate of interest minus the rate of inflation.