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Basics of Monetary Policy
Money
The Money Market
Evaluating Monetary Policy
More on Monetary Policy
100
What is monetary policy?
a central bank’s manipulation of money supply and interest rates
100
What are two functions of money?
Unit of accounting Store of value Medium of exchange
100
There is a recession with large amounts of unemployment and low demand for goods and services. Will banks raise or lower interest rates?
Money is less scarce and banks lower Interest Rates to keep borrowers coming
100
True or False: With high inflation, its likely that contractionary monetary policy alone would work to bring inflation under control
False: It is unlikely
100
What is the equation for the money multiplier?
1/ required reserve ratio
200
What is an example of a central bank?
The Federal Reserve
200
True or False: The demand for money has an inverse relationship with interest rates
True
200
Choose decrease or increase: As GDP increases, more $ is demanded for households; as it becomes more scarce, banks (decrease / increase) interest rates.
Increase
200
With expectations of future deflation, will the private sector have a strong incentive to save or to spend?
To save, since money saved now will be worth more in the future
200
What is the total reserve equation in banking?
required reserves+ excess reserves
300
Give two objectives monetary policy hopes to achieve
Full employment Economic Growth Price Level Stability
300
What does it mean for money to be liquid? Put these in order from Most to Least Liquid: Savings Deposits Bonds Paper Currency
How easily an asset can be converted to cash M1- Paper Currency M2- Savings Deposits M3- Bonds
300
Increases in the supply of money is (expansionary / contractionary) monetary policy. Banks would (increase / decrease) interest rates Decreases in the supply of money is (expansionary / contractionary) monetary policy. Banks would (increase / decrease) interest rates.
Expansionary, decrease Contractionary, increase
300
When in a recession, would a country use expansionary or contractionary monetary policy to help bring an economy back to full employment?
Expansionary
300
What is one monetary policy tool?
Open Market Operations- makes it easier to borrow Reserve Ratio