Monetary Policy

And Macroeconomic Stabilization

Monetary Policy - actions the fed takes to try to influence Real GDP and inflation

There are two kinds: easy money policy and tight money policy. Easy money policy increases the money supply, thus decreasing interest rates. Tight money policy is the exact opposite. Decreasing money supply, increasing interest rates.

Another important thing is to make sure the policy is delivered on time. While a well timed policy can help the business cycle, a badly timed policy does just the opposite.

Policies can also lag- or take time to come to effect. When the Fed is taking time identifying the problem and writing up the policy, it's called "inside lag." When a policy is put into place and it takes a while to start effecting the economy, it's called "outside lag."

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