Monetary Policy

Question 1

What is monetary policy used for?

Answer 1

To maintain price stability.

Question 2

What are the three monetary policy tools?

Answer 2

1. Open market operations (buying/selling securities govt. securities). 2. Policy Interest Rate 3. Reserve Requirements

Question 3

When has monetary policy lost its effectiveness

Answer 3

When the fed keeps increasing the quantity of money but people would still rather hold money than borrow or lend. Usually during deflation

Question 4

What is the formula for the money multiplier?

Answer 4

1 / reserve requirement

Question 5

What is the formula for money supply change?

Answer 5

Change in bank reserves * money multiplier (inverse of the reserve requirement).

Question 6

Give the formula linking money supply and GDP?

Answer 6

MV = PY. Only M and P have an effect on eachother. V and Y are fixed.

Question 7

What are dollarization and monetary union currency regimes?

Answer 7

Dollarization = adapting another country’s currency. Monetary Union = Group of countries set single monetary entity.