DSST Money & Banking Part 1

Recessions may be associated with falling prices

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measures of overall economic activity such as employment, investment, and corporate profits. Recessions may  be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as  stagflation . A severe or long recession is referred to as an  economic depression . A devastating breakdown of 
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an economy is called  economic collapse . Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic  activity) do not always result. There is much debate as to whether government intervention smoothes the cycle  (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism). Monetary Policy:  Central Bank use of monetary instruments (discount rate, open market operations, and reserve  requirements) to influence interest rates and monetary aggregates in an attempt to achieve economic goals including:  Price Stability, Low Unemployment, High Economic Growth, Stable Financial Markets, and Stable International  Markets . Effects of Monetary and Fiscal Policies:  Impact depends on direct effects on aggregate demand and indirect  effects on aggregate supply Policy Determinants : Factors that the FED takes into account in setting  Targets  (variables that the FED seeks  to achieve), and  Constraints  (limiting values of other variables of concern to the FED such as the FED may have  a 10% Federal Funds Rate as an operating target and order the account manager to hit the 10% rate.)   Proviso  Clause:  FOMC directive to the account manager Fed Targets:  Operating Targets  Short run targets FED hopes to achieve in immediate or short term  Intermediate Targets:   Variables that are influenced by the operating targets and in turn are more  closely associated with the ultimate goal variables such as the inflation rate. Monetary Targeting:  In order for target to be a good target, it should have the following:  Be  measurable  (such  as interest rates, whereas GNP is not so on a daily basis) controllable  (FED instruments discount rate, FOMC  operations, and reserve requirements) , and be  predictable in its impact (inflation and unemployment) . Monetary Transmission Process:  A sequence of responses in financial, product, and labor markets to money  policy actions. Short Term Interest Rate Targets:   It is not generally the case that a desired interest rate level and money supply level are  simultaneously attainable.   If the uncertainty in monetary control is due to changes in the banks’ demand for excess reserves and  borrowed reserves or changes in the public’s demand for currency relative to deposits, interest rate  targets will permit effective control of the quantity of money supplied.
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