Monetary policy is attempts by the government to influence the rate of money creation by private banks. Fiscal policy is the use of the government s taxing and spending powers. Slide 25 Money is defined as a sufficiently widely accepted medium of exchange . Money is defined around liquidity , the ease with which an asset can be converted into the universally accepted medium of exchange. Microsoft stock is much less liquid, even though having it makes you wealthier than not having it.
Banks create most of the money supply every time they lend money.
Control over two interest rates , which are established by vote during Fed meetings a. The discount rate determines the rate banks must pay to borrow from the Fed itself. Expansionary monetary policy is used to get the economy growing more rapidly when a recession is imminent or has already begun. Contractionary monetary policy tries to slow the economy down when it is threatened with overheating. Slide 29 Costs of unexpected inflation - Arbitrary reallocation of wealth from lenders to borrowers.