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Explain the fundamentals behind why changes in the money supply have real effects on the economy and the monetary transmission mechanism.

Explain how monetary policy can be used to effectively stabilize output and smooth business cycles.

Evaluate the role of monetary policy and how it affects the macroeconomy given the implications of the financial accelerator.

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

  1. Assume that the Federal Reserve (%u201Cthe Fed%u201D) unexpectedly shifts to restrictive monetary policy. Why would the Fed make such a policy shift? Explain how the Federal Reserve will implement this restrictive monetary and how the effects of this policy will ripple through the economy to impact real output both in the short run(SRAS) and in the long run (LRAS).

  1. Using the Federal Reserve%u2019s report (see link below) on Money Stock Measures for June 7, 2012 determine the growth rate of the Seasonally Adjusted M1 Money Supply between January 2011 and January 2012. State the rate of growth as a percent of January 2011 Seasonally Adjusted M1 Money Supply. Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why. Link to report: http://www.federalreserve.gov/releases/h6/

  1. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

  1. What is the Quantity Theory of Money? What are its implications? Does the theory have any shortcomings, if so what are they? Have the predictions of the Quantity of Theory of Money proven accurate?

Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

1. Impact of Monetary Policy How does the Fed’s monetary policy affect economic conditions?

2. Trade-offs of Monetary Policy Describe the economic trade-off faced by the Fed in achieving its economic goals.

3. Choice of Monetary Policy When does the Fed use a loose-money policy, and when does it use a tight- money policy? What is a criticism of a loose-money policy? What is the risk of using a monetary policy that is too tight?

4. Active Monetary Policy Describe an active monetary policy.

5. Passive Monetary Policy Describe a passive monetary policy.

6. Fed Control Why may the Fed have difficulty controlling the economy in the manner desired? Be specific.

7. Lagged Effects of Monetary Policy

Compare the recognition lag and the implementation lag.

8. Fed’s Control of Inflation Assume that the Fed’s primary goal is to reduce inflation. How can it use open market operations to achieve this goal? What is a possible adverse effect of such action by the Fed (even if it achieves the goal)?

9. Monitoring Money Supply Why do financial market participants closely monitor money supply movements?

10. Monetary Policy during the Credit Crisis

Describe the Fed’s monetary policy response to the credit crisis.

22. The Fed’s Impact on the Housing Market In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods, when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fed’s monetary policy and thereby affect home prices?

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