Tax and Fiscal Policy

There are three major vehicles of monetary policy. They are open market operations, changing the reserve requirement, and manipulating the federal funds interest rate.

Expansionary monetary policy is policy enacted by the Fed that increases the money supply, decreases the interest rate, and increases output. The three types of expansionary monetary policy are purchasing government bonds on the open market, reducing the reserve requirement, and reducing the federal funds interest rate.

Contractionary monetary policy is policy enacted by the Fed that decreases the money supply, increases the interest rate, and decreases output. The three types of expansionary monetary policy are selling government bonds on the open market, increasing the reserve requirement, and increasing the federal funds interest rate.

Given a constant money demand, under expansionary monetary policy the money supply increases and interest rates decrease. This leads to economic expansion and an increase in output.

Given a constant money demand, under contractionary monetary policy the money supply decreases and interest rates increase. This leads to economic contraction and a decrease in output.