Monetary Economics (ECS3701) Selected Examination Questions and suggested solutions ch: 5

Fed can stimulate the economy by... - -creating a loose-money policy and engages in: (increasing level of spending) 1.) buying government securities 2.) lowering the discount rate 3.) lowering the reserve requirement -The Fed can constrain economic activity when... (correcting high inflation) - -it creates a tight money policy and: (reduce money supply) 1.) sells government securities 2.) raises the discount rate 3.) increases the reserve requirement -the trade off in monetary policy - -Studies indicate there exists an inverse relationship between inflation and unemployment: -the lower the unemployment, the greater the inflation, -the higher the unemployment, the lower the inflation -When inflation is high - --tight money policy is considered. -Tradeoff is higher unemployment