UNIT 12: MONETARY POLICY

Question 1

How many main ideas are there in Unit 12?

Answer 1

I will summarize Unit 12. Unit 12 is about monetary policy. In my opinion, there are 3 main ideas:

*1. Firstly, it talks about OBJECTIVES (goals) of MP:

*2. Secondly, it talks about the QUANTITATIVE TOOLS OF MP:

• CHANGING THE RESERVE REQUIREMENT:
• CHANGING THE DISCOUNT RATE:
• OPEN MARKET OPERATIONS:

*3. Thirdly, it talks about 2 TYPES OF MP:

• EXPANSIONARY MP:
• RESTRICTIVE MP:

Question 2

What are the objectives (or goals) of monetary policy?

Answer 2

• price stability
• Exchange stability
• full employment and maximum output
• Economic growth.

Question 3

how many quantitative tools of Monetary Policy are there?

(=What are three quantitative tools of monetary policy?)

Answer 3

there are 3 quantitive tools:

• changing the reserve requirement
• changing the Discount rate
• Open market operations.

Question 4

what is the monetary policy?

Answer 4

Monetary policy is a government policy related to a nation’s money supply by each country’s central bank.

Question 5

what is called reserve requirement?

Answer 5

-is the percentage the Fed sets as the minimum amount of reserves a bank must have.

Question 6

How does the Fed control the percentage of deposits banks keep in reserve?

Answer 6

by controlling the reserve requirement of all US banks.

Question 7

How does the reserve requirement affect the money supply?

Answer 7

When the Fed increases RESERVE REQUIREMENT, it decreases the money supply and vice versa.

Question 8

what determines the amount banks hold as reserves?

Answer 8

the Fed requirements

Question 9

what is the central role of the reserve requirements? Why?

Answer 9

• the reserve requirements play a central role in how much money banks have to lend out.

​

• Because the amount most banks need for safety is much smaller than what the Fed requires, it’s the Fed’s Reserve requirement that determines the amount they hold as reserves.

Question 10

what is the second tool of MP?

Answer 10

CHANGING THE DISCOUNT RATE: -is the rate of interest the Fed charges for loans

Question 11

what is the discount rate?

Answer 11

is the rate of interest the Fed charges for loans.

Question 12

How does the discount rate affect the money supply?

.

Answer 12

When the Fed increases the Discount rate, it contracts the money supply and vice versa

Question 13

what does “open market operation” mean?

(=what is OPEN MARKET OPERATION?)

Answer 13

OPEN MARKET OPERATION is the government’s buying and selling governments securities/ treasury bonds.

Question 14

How does open market operation affect the money supply?

Answer 14

when the Fed sells Treasury bonds, it decreases the money supply and vice versa.

Question 15

What is a primary tool of monetary policy?

Answer 15

It’s open market operation.

Because:

• changes in discount rate and reserve requirement are not used in day-to-day fed operation.
• They are used mainly for major changes.

=> for day-to-day Fed operations, the fed uses open market operation.

Question 16

how can the central bank shift aggregate demand?

Answer 16

by making more or less money available

Question 17

When does the aggregate demand curve shift to the right/ left?

Answer 17

When there is an increase/decrease in the money supply.

Question 18

What are two types of monetary policy?

Answer 18

Question 19

how can the banks encourage people to borrow and spend more money?

Answer 19

They can encourage people by offering lower interest rates or easier approvals.

Question 20

When will prices begin rising?

Answer 20

Prices will start rising when market participants bid against each other for increasing scarce goods.

Question 21

How the central bank can reduce the money supply?

Answer 21

by raising reserve requirement, increasing the discount rate, and selling bonds in the open market.

Question 22

What is the relationship between monetary policy and fiscal policy?

Answer 22

They are interdependent and complement one another because there are many overlapping issues between two policies

Question 23

What are the differences between expansionary and restrictive monetary policy?

Answer 23

Question 24

when might the central bank want to reduce money supply?

Answer 24

when the economy is overheating.

Question 25

What is an expansionary monetary policy?

Answer 25

Monetary is expansionary when the money supply is increased.

Question 26

summarize unit 12: monetary policy

Answer 26

I will summarize Unit 12. Unit 12 is about monetary policy. In my opinion, there are 3 main ideas:

**1. Firstly, it talks about OBJECTIVES (goals) of MP:*

• price stability
• Exchange stability
• full employment and maximum output
• Economic growth.

**2. Secondly, it talks about the QUANTITATIVE TOOLS OF MP:*

• CHANGING THE RESERVE REQUIREMENT:
• the percentage the Fed sets as the minimum amount of reserves a bank must have.

+ When the Fed increase RR, it decreases the money supply and vice versa.

• CHANGING THE DISCOUNT RATE:
• is the rate of interest the Fed charges for loans

+When the Fed increases the DR, it contracts the money supply and vice versa.

• OPEN MARKET OPERATIONS:
• are the Fed’s buying and selling gov securities
• when the Fed sells Treasury bonds, it decreases the money supply and vice versa.

**3. Thirdly, it talks about 2 TYPES OF MP:*

• EXPANSIONARY MP:
• MP is expansionary when the MONEY SUPPLY is increased.
• MP SHOULD BE expansionary when the economy is slowing down
• the Central Bank increases the money supply by lowering reserve requirements, dropping discount rate, or buying more bonds.
• RESTRICTIVE MP:
• when the money supply is decreased
• MP SHOULD BE expansionary when the economy is overheating
• The Central bank decreases the money supply by raising reserve requirements, increasing the discount rate, or selling bonds.

(Nguồn tham khảo: tài liệu do Giảng viên Phạm Thị Thu cung cấp)

Question 27

What is a restrictive monetary policy?

Answer 27

Monetary policy is restrictive When the money supply is reduced.

Question 28

when might the central bank want to increase money supply?

Answer 28

when the economy is slowing down.

Question 29

1. when the Government buys more Bonds, is it borrowing or lending?
2. when the Government issues more Bonds, is it borrowing or lending?

Answer 29

1. Lending.
2. Borrowing.