Podcast
Questions and Answers
What action should the Fed take to decrease the money supply by $300 million?
What action should the Fed take to decrease the money supply by $300 million?
If the output grows at a rate of g, at what rate will the demand for real balances grow?
If the output grows at a rate of g, at what rate will the demand for real balances grow?
What is the velocity of money in this economy based on the relationship between M/P and Y?
What is the velocity of money in this economy based on the relationship between M/P and Y?
If the nominal interest rate is constant, what will be the growth rate of velocity?
If the nominal interest rate is constant, what will be the growth rate of velocity?
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What does the classical dichotomy imply about nominal and real variables?
What does the classical dichotomy imply about nominal and real variables?
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What does monetary neutrality state about changes in monetary variables?
What does monetary neutrality state about changes in monetary variables?
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How can the relationship between real money supply and money demand be expressed?
How can the relationship between real money supply and money demand be expressed?
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What happens to the growth of velocity if inflation and nominal interest rates remain constant?
What happens to the growth of velocity if inflation and nominal interest rates remain constant?
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What are the three qualities that define something as money?
What are the three qualities that define something as money?
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Who heads the organization responsible for controlling the money supply in the United States?
Who heads the organization responsible for controlling the money supply in the United States?
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Which of the following is NOT a primary tool used by the Federal Reserve to control the money supply?
Which of the following is NOT a primary tool used by the Federal Reserve to control the money supply?
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During the Great Depression, what caused the total money supply to decrease despite an increase in the monetary base?
During the Great Depression, what caused the total money supply to decrease despite an increase in the monetary base?
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If the currency ratio (cr) is $0.2$ and the reserve ratio (rr) is $0.2$, what is the money multiplier for this economy?
If the currency ratio (cr) is $0.2$ and the reserve ratio (rr) is $0.2$, what is the money multiplier for this economy?
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What effect does raising the required reserve ratio (rr) have on the money supply?
What effect does raising the required reserve ratio (rr) have on the money supply?
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Which of the following statements best describes the Federal Reserve's quantitative easing?
Which of the following statements best describes the Federal Reserve's quantitative easing?
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Study Notes
Types of Money
- Commodity Money: Money with intrinsic value (e.g., gold coins)
- Fiat Money: Money without intrinsic value, but legal tender (e.g., US Dollar)
- Bank Money: Demand deposits held at financial institutions (e.g., checking accounts)
Money Supply Control in the US
- Federal Reserve (Fed): Controls the money supply
- Jerome Powell: Current Chair of the Federal Reserve
- Federal Open Market Committee (FOMC): Main tool for controlling the money supply
- Open Market Operations (OMO): Buying and selling securities to impact monetary base
- Discount Rate: Interest rate charged by the Fed to commercial banks for short-term loans
- Interest Rate on Excess Reserves (IOER): Interest rate paid by the Fed to commercial banks on excess reserves
- Required Reserve Ratio: Proportion of deposits that banks must hold in reserve (theoretically adjustable, but rarely used)
Qualities of Money
- Store of Value: Hold value over time
- Unit of Account: Common measure of value
- Medium of Exchange: Facilitates transactions
Money Multiplier and Monetary Base
- Currency Ratio (cr): Proportion of currency held by the public relative to deposits
- Reserve Ratio (rr): Proportion of deposits held by banks as reserves
-
Money Multiplier (mm): Amplifies the impact of changes in the monetary base on the money supply
- mm = 1 + cr / (cr + rr)
- Change in Money Supply (ΔM): ΔM = mm × ΔMB
Great Depression and Money Supply
- During the Great Depression, the monetary base increased but the money supply decreased.
- This was due to a sharp decline in the money multiplier.
- Banks failed, leading to reduced lending and increased reserves held by banks.
- Public distrust led to increased currency holding (higher cr).
Monetary Policy Example
- Goal: Reduce money supply by $300 million.
- Action: The Fed sells $100 million worth of securities.
- Reasoning: ΔMB = ΔM / mm = - $300 million / 3 = - $100 million
Money Demand and Velocity
- Money Demand Function: (M/P)d = L(i,Y) = Y/(5i)
- Real Balances Growth: Grows at the same rate as output (g) if nominal interest rates are constant.
- Velocity of Money (V): V = 5i
- Velocity Growth: Constant if nominal interest rates are constant.
Classical Dichotomy and Monetary Neutrality
- Classical Dichotomy: Nominal variables (e.g., money supply) do not affect real variables (e.g., real GDP) in the long run.
- Monetary Neutrality: Changes in monetary variables do not affect real variables, assuming perfectly flexible prices.
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Description
This quiz covers the different types of money, including commodity, fiat, and bank money. Additionally, it explores the mechanisms of money supply control in the United States, focusing on the role of the Federal Reserve and its various tools. Test your knowledge on the qualities of money and the Federal Open Market Committee's operations.
