Monetary Policy
What are the 2 macroeconomic objectives of implementing monetary policies.
Price stability
Full employment
What causes interest rate changes?
Shifts in money supply
True or False?
In limited reserves environments, the effect of an OMO on the monetary base is greater than the effect on the money supply because of the money multiplier.
False
What is monetary policy?
The central bank's policies of influencing nominal interest rates to help achieve prices stability and full employment.
What are the 3 monetary policy tools?
Required reserve ratio
discount rate
open market operations
Formula for money multiplier
Money multiplier = 1/ Req. Res. Ratio
true or false
interest rate changes affect price level, fixed input, unemployment through shifts for the SRAS curve
false
it affects real output, price level and unemployment through shifts of AD curve
If the central bank lowers the discount rate what will happen to the money supply and nominal interest rate?
Money supply increases
Nominal interest rate decreases
What are the 3 Assumptions for the Money multiplier?
Banks hold no excess reserves
Borrowers spend their entire loans
Customers hold no cash
Explain Expansionary monetary policy.
When the central bank decreases nominal interest rates in the short run to get and economy out of a recessionary gap.
If the central bank buys bonds what will happen to money supply and nominal interest rates
Money supply will increase
nominal interest rate will decrease
How will a central bank buying and selling bonds affect liabilities?
It doesn't.
Explain one of the 2 monetary policy lags
Recognition lag: it takes time for the central bank to collect and analyze data to realize that there is a problem in the economy
OR
Impact Lag: It takes time for the economy to adjust after the policy action is taken.
Describe a Limited reserves Framework.
LRF is a banking system in which:
Reserves are not overly abundant.
There is a non zero requirement.
Commercial banks hold required reserves and possibly excess reserves.
Monetary policy works by changing the supply of the excess reserves and, therefore, the money supply.
If a central bank sells $2000 in government bonds and the required reserve ratio is 50%.
what is the maximum possible impact on the money supply.
$1000 decrease