Terminology

Monetary Policy
Policy set by the monetary board (central bank) of a country to
control the supply of money. Often targets inflation rate or
interest rate
Federal Reserve in the US (Chairman is Janet Yellen)
Most US monetary policy attacks interest rates
 Fiscal Policy
The use of government revenue collection (taxes) and
expenditure (spending) to influence the economy (Keynesian)
 Inflation Rate
The sustained increase in the general price level of goods and
services in an economy
Healthy economy has 2-3% inflation on the CPI
 Interest Rate
The amount of interest due per period, as a proportion of the
amount lent
 Consumer Price Index
Take price of all basic staples, and find cost of survival
 GDP
Standard Measure of the health of an economy
The monetary of all final goods and services produced in a
period
GDP = Consumption + Investment + Government Spending +
(exports imports)
 Fiscal Policy
Prior to Great Depression, the governments approach to the
economy was laissez-faire
Following the Depression and World War II, the government
took a direct role in the economy though the regulation of
business cycles, inflation, unemployment, and the cost of
money (this sounds weird, but its the amount of profit one can
make if the invest in government bonds)
Based on Keynesian theory, the government can influence the
economy by increasing or decreasing tax levels and public
spending
Can change the inflation rate
BUT
Increasing money supply + resulting increase in consumer
demand = High inflation (lower buying power of money)
 Monetary
Determines the size and growth of the money supply, affecting
interest rates
Monetary Policy is modifying the interest rate, buying or
selling government bonds, and changing the amount of money
banks are required to keep in reserve
Can be traced to Bank of England in 1694, which was given the
power to print notes and back them with gold independent of
executive action
Fed founded in 1907 in response to several economic panics
If interest rates are low, people are more willing to borrow
money to buy houses, cars, open businesses, invest, etc.
If rates are high, the opposite is true