- Controlling the money supply is a key macroeconomic policy tool. Explain how the Fed controls the money supply and what separates the balance sheet of the Fed from that of ordinary commercial banks.
- In the conduct of monetary policy the Fed has influence over the monetary base, some interest rates and the reserve ratio. Please explain: A) how these effect the money supply and B) what effect that in turn will have on the broader economy.
- Please describe the three main tools of monetary policy available to the Fed and the relative strengths and weaknesses of each. Please rank order them in their effectiveness of influencing the overall economy.
- Please describe the primary macroeconomic objectives of the Fed. What practical problems does the Fed face when conducting monetary policy? Do these problems differ in the short and long terms? As part of its policy tools the Fed can act as a lender of last resort – what is the time inconsistency problem this can create when acting as a lender of last resort? What role does this play in the conduct of monetary policy?
- It has been said that the price of a nation’s currency on foreign exchange market is the single most important price in the entire economy. Do you agree? If so why and if not why not?
- The demand for money is explained by two major and somewhat competing theories explain why individuals and firms hold money (as opposed to other assets). Please describe the main differences between the quantity theory of money and the liquidity preference theory. What implications do these have for the conduct of monetary policy?
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