Types and Control of Money in the US

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Questions and Answers

What action should the Fed take to decrease the money supply by $300 million?

Buy $100 million worth of securities

Increase interest rates

Sell $100 million worth of securities (correct)

Lower reserve requirements

If the output grows at a rate of g, at what rate will the demand for real balances grow?

At the same rate as output, g (correct)

At a rate less than g

At a rate of zero

At a rate greater than g

What is the velocity of money in this economy based on the relationship between M/P and Y?

V = Y / (5i)

V = M / (5i)

V = 5i (correct)

V = P / Y

If the nominal interest rate is constant, what will be the growth rate of velocity?

Remains unchanged Signup and view all the answers

What does the classical dichotomy imply about nominal and real variables?

Changes in nominal variables do not affect real economic outcomes Signup and view all the answers

What does monetary neutrality state about changes in monetary variables?

They have no impact on real variables Signup and view all the answers

How can the relationship between real money supply and money demand be expressed?

M/P = L(i, Y) Signup and view all the answers

What happens to the growth of velocity if inflation and nominal interest rates remain constant?

It remains steady at zero Signup and view all the answers

What are the three qualities that define something as money?

Store of value, unit of account, medium of exchange Signup and view all the answers

Who heads the organization responsible for controlling the money supply in the United States?

Jerome Powell Signup and view all the answers

Which of the following is NOT a primary tool used by the Federal Reserve to control the money supply?

Offering loans to consumers Signup and view all the answers

During the Great Depression, what caused the total money supply to decrease despite an increase in the monetary base?

Drastic reduction in the money multiplier Signup and view all the answers

If the currency ratio (cr) is $0.2$ and the reserve ratio (rr) is $0.2$, what is the money multiplier for this economy?

$4$ Signup and view all the answers

What effect does raising the required reserve ratio (rr) have on the money supply?

Decreases the money supply Signup and view all the answers

Which of the following statements best describes the Federal Reserve's quantitative easing?

It increases the monetary base to stimulate the economy. Signup and view all the answers

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.