Monetary Policy

Question 1

M1

Answer 1

Cash and Checking Deposits

Question 2

M2

Answer 2

“Near Money” - includes savings deposits, money market mutual funds, and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted to cash or checking deposits.

Question 3

Money Multiplier

Answer 3

Measures the maximum amount of commercial bank money that can be created by a given unit of Central Bank money.

Question 4

How does Monetary Policy influence the real economy?

Answer 4

• Interest Rate Channel, Liquidity Effect: Increase in money supply, decreases interest rate, which increases Consumption and Investment.
• Credit Channel, Bank Lending Channel: Increase in Bank Reserves and deposits leads to increase in bank loans, which leads to increases in Consumption and Investment.

Question 5

Fed Dual Mandate

Answer 5

1. Stabilize Prices,

2. Maximize Employment / Encourage real economic activity

Question 6

Fed Policy Targets

Answer 6

1. Fed Funds Rage

2. Inflation Rate (2% target for Personal Consumption Expenditures Core Inflation)

Question 7

Deposit Expansion Process

Answer 7

The Federal Reserve and other central banks require that banks must hold a minimum amount (required reserve) of money in their reserves in order to fulfill withdrawal requests from depositors. Banks are then allowed to lend out any excess to borrowers (such as for mortgages), while the liability incurred as a result of depositors is still on the books.

Question 8

FOMC

Answer 8

Federal Open Market Committee: Sets the federal funds rate, which is the rate on loans of reserves between commercial banks.

Question 9

Primary Dealers

Answer 9

Private banks with which the Fed conducts open market operations.

Question 10

Fiscal vs Monetary Policy

Answer 10

• Fiscal: Changing tax rates and levels of Gov’t spending to influence AD in economy (tax & spending of Federal Gov’t)
• Monetary: Changing interest rate and influencing money supply.