CHAPTER 13

 

MONETARY POLICY AND THE NATIONAL ECONOMY

 

  

DISCUSSION QUESTIONS

 

1.   A central bank promotes the safety of the country’s banking system, by requiring sound business practices of its member banks and by acting as a lender of last resort. It controls the size of the country’s money supply. If a banking system with fractional reserves were not controlled, the money supply would expand in boom times and contract in recessions.

2.   Opinions will differ, although the main reason seems to be the desire to fight inflation. The text outlines the arguments briefly but clearly; the students should be expected to develop their own arguments logically.

4.   The Fed can lower interest rates by increasing the supply of money. The Fed can use any of its three tools of monetary control: open-market purchases, a decrease in the required reserve ratio, or encouragement of member bank borrowing. In Figure 1, an increase in the reserve from S₀ to S₁ reduces the interest rate from i₀ to i₁.

 

            Figure 1

 

 

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