Money And Monetary Policy

Question 1

3 functions of money

Answer 1

Medium of exchange
Unit of account
Store of value

Question 2

Money stock (supply) formula

Answer 2

Currency + demand deposits

Question 3

2 jobs of the fed

Answer 3

Regulate banks and ensure health of the banking system

Control the money supply

Question 4

How do réserves create money (formulas)

Answer 4

X deposited with reserve requirement 1/R
Multiplier = R
Money created = X*R

Question 5

Leverage ratio

Answer 5

Assets/bank capital(owners equity)

Question 6

How do open market operations change the money supply

Answer 6

Change the quantity of reserves
-buy bonds -> more money supply
Sell bonds -> lower money supply

Question 7

How does the discount rate change the money supply

Answer 7

Discount rate influences bank lending, and changes the quantity of reserves through loans to banks

• inc. discount rate, less loans, less reserves, money supply decreases
• dec. discount rate, more loans, more reserves, money supply increases

Question 8

4 ways the fed can change the money supply

Answer 8

Open market operations
Discount rate
Reserve requirement
Interest on reserves

Question 9

How does changing the reserve requirement affect the money supply

Answer 9

Impacts money creation, money multiplier

• inc. reserve requirement, more reserves, less loans, multiplier decreases, MS decreases
• dec. reserve requirement, less reserves, more loans, multiplier increases, MS increases

Question 10

How does changing the interest rate on reserves affect money supply

Answer 10

increase IR, more reserves, lower multiplier, decrease in money supply
decrease IR, less reserves, multiplier increases, money supply increases

Question 11

2 problems with the feds ability to control the money supply

Answer 11

1. No control over how much households deposit in a bank (quantity of reserves)
2. No control over banks’ decision to lend/loans

Question 12

What is the federal funds rate

Answer 12

Rate banks charge one another for loans