Review Questions

10.

How is a central bank different from a typical commercial bank?

11.

List the three traditional tools that a central bank has for controlling the money supply.

12.

How is bank regulation linked to the conduct of monetary policy?

13.

What is a bank run?

14.

In a program of deposit insurance as it is operated in the United States, what is being insured and who pays the insurance premiums?

15.

In government programs of bank supervision, what is being supervised?

16.

What is the lender of last resort?

17.

Name and briefly describe the responsibilities of each of the following agencies: FDIC, NCUA, and OCC.

18.

Explain how to use an open market operation to expand the money supply.

19.

Explain how to use the reserve requirement to expand the money supply.

20.

Explain how to use the discount rate to expand the money supply.

21.

How do expansionary and contractionary monetary policy affect the quantity of money?

22.

How do tight and loose monetary policy affect interest rates?

23.

How do expansionary, tight, contractionary, and loose monetary policy affect aggregate demand?

24.

Which kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why?

25.

Explain how to use quantitative easing to stimulate aggregate demand.

26.

Suppose that a borrower and lender agree to a loan contract with a nominal interest rate of 7 percent. Over the life of the loan, if each expects the rate of inflation to be 2 percent, what is the expected real interest rate? If the actual rate of inflation is 4 percent, what is the actual real interest rate, and who comes out ahead, the borrower or the lender?

27.

Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?

28.

How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?

29.

Define the velocity of the money supply.

30.

What is the basic quantity equation of money?

31.

How does a monetary policy of inflation targeting work?

32.

What are the main pitfalls for monetary policy?