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1. Describe three characteristics of the
Federal Reserve related to its origin or structure.
What is the main purpose of the Federal
Reserve, and what are the three main tools of monetary policy the Fed possesses to achieve this purpose?
The inflation rate currently sits at 9%.
Describe how you would use the three tools of monetary policy to pursue either an expansionary (easy money) or contractionary (tight money) policy.

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Economic instability leads to social and economic problems

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Unemployment
Inflation
Stagflation- stagnant growth combined with inflation

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The GDP Gap- the difference between actual production and what it could be
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We use the production possibilities frontier to illustrate this

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The MISERY or DISCOMFORT index
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Statistic of inflation and unemployment added together
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Measures consumer suffering
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Is used over the long term

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UNCERTAINTY on the side of the worker
(their job) and employers (decision to expand or not)

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The human cost:
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Reduced standard of living
Labor resource is wasted (people can’t find work)

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Political instability
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Crime
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Family values

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The government can promote economic growth through demand-side and supply-side policies
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Economic stability an be achieved in several ways: aggregate supply, aggregate demand, and monetary policy

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The government can manipulate consumer demand through FISCAL
POLICY: taxing and government spending
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FISCAL POLICIES are derived from
Keynesian economics, a set of actions designed to lower unemployment by stimulating aggregate demand

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GDP=C+I+G+F
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C= CONSUMER SPENDING
G=GOVT SPENDING
F=FOREIGN SECTOR SPENDING
I=BUSINESS (INVESTMENT) SECTOR
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The MULTIPLIER AND ACCELERATOR (I)

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Spend Spend Spend to offset declines in
Business sector (I)
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Lower taxes (Laffer curve)
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Automatic Stabilizers: Unemployment, transfer payments, progressive income tax
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Check the rest on page 450

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Policies designed to stimulate output and reduce unemployment through increased production
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1970’s 1980’s- very popular

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Increase production and reduce unemployment without increasing inflation
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EXACT SAME GOAL AS DEMAND SIDE
ECONOMICS

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MONETARISM- the role of money and its growth (Equation of Exchange)
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Stable and long-term monetary growth will control inflation
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Done through controlling interest rates
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Takes care of inflation, but not unemployment