4.6: Monetary policy

Question 1

What are the three shifters of the money supply?

Answer 1

1. The reserve requirement
2. The discount rate
3. Open Market Operations

Question 2

What happens when the fed increases the money supply?

Answer 2

It increases the amount of money held in bank deposits, banks keep some of that moeny and loan out their excess reserves. These loans eventually become deposits for another bank that will loan out reserves.

Question 3

What can the fed do to increase the money supply?

Recession

Answer 3

1. Decrease the reserve ratio
2. The discount rate
3. Open Market Operations

Question 4

Decreasing the reserve ratio

Answer 4

Banks hold more money and have more excess which creates more money by loaning out excess so the money supply increases, interest rates fall, AD goes up

Question 5

Discount Rate

Answer 5

The interest rate that the central bank charges commercial banks

Question 6

Discount rate and money supply

Answer 6

The central bank can decrease the discount rate

Question 7

Open Market Operations

Answer 7

When the central bank buys or sells government bonds. Buying bonds increases the money supply.

Question 8

The federal fund rate

Answer 8

The interest rate that banks charge one another for one day loans of reserves.

Question 9

Interests on Reserve (IOR)

Answer 9

The interest rate that the federal reserve pays commercial banks to hold reserves

Question 9

Administered Rates

Answer 9

Interest rates set by the FED rather than determined in a market