Chapter 15 Monetary Policy
A more concise
One-Page Test Review of Chapter 15 may help with exams.  

Updated 7/23/18          

I. The Demand for Money
II. Monetary Policy

III. Types of Monetary Control  

IV. Implementing Monetary Policy

V. Effectiveness of Monetary Policy
VI. Modern Monetary Policy
VII. QE2 Keeps Money Loose Readings
VIII. Review Videos

Practice Quizzes

Recent Thoughts of Ben Bernanke
Negative interest rates
Targeting longer-term rates
Helicopter money
A Large Balance Sheet?
Global Savings Glut and Low Interest Rates

I. The Demand for Money 
A. Transaction D, Dt results because people hold money, often in
         a money market account, to use as a medium of exchange.
    B. Asset Demand, Dresults because people accumulate money,
         often held in an investment account, to buy assets and other needs
    C. The demand for money, Dm= Dt + D
D. For more information visit Demand for Money - Wiki
    E. Affecting the non-investment components of aggregate demand
         1. Lower interest rates also increase C, G, and XN
             a. Consumption increases as credit purchases become cheaper.
             b. Refinancing existing debt at lower interest rates by individuals, businesses,
                 and governments frees funds for spending.
             c. Lower interest rates also decrease the international value of the dollar as
                 investors buy (demand) other currencies to earn more interest. The lower
                 dollar increases XN as U.S. goods are less expensive and foreign goods
                 more expensive.
         2. Higher interest rates have an opposite affect
         3. Currency Exchange Rates and Economic Activity
             a. Value of a currency determines price of import and export goods
             b. Increase in money supply cause inflation lowering the value of currency
                making exports cheaper and imports more expensive.
             c. Exports increase as they are less expensive in real terms and imports
                decrease as conversion to yen makes Toyota's more expensive
             d. Readings
1. A  strong Dollar is Always Good Except When It  Isn't. 1/24/15
                 2. U.S Government's Problem With a Strong High Valued Dollar 2/5/15
                 3. A Brief History of U S Dollar Debasement 1/8/13

         F. Federal reserve balance sheet. 
             1. Assets are held in securities and loans to commercial banks.
             2. Liabilities and net worth re the reserves of commercial banks, treasury deposits,
                 federal reserve notes, and equity (accumulated profits).
         G. Summary: Monetary Policy is the regulation of the money supply to affect
              interest rates which economic growth

Average ratio to GDP of unsecured and
mortgage bank credit

Average ratio to GDP of unsecured and mortgage bank credit

Ratio of total mortgages to total value
of U.S. housing stock

Source: Jordà, Schularick, and Taylor (2016).

See Bubbles Credit And Their Consequences

III. Types of Monetary Controls
        A. Quantitative affect the money supply.
             1. Required Reserve Ratio
a. Lowering the reserve ratio creates excess reserves which banks may loan
                     as newly created money. This is expansionary.
                 b. Raising the reserve ratio eliminates excess reserve so banks can not renew
                     loans removing money and causing a contraction.
             2. Open-market operations
                 a. Buying and selling of U.S. government bonds by the Federal Reserve from banks
                     or in the open market to change excess reserves thus affecting the supply of M1
                     and interest rates is the primary tool.
                 b. Buying bonds is expansionary.
                     1) When buying from banks, the Federal Reserve pays with reserves providing
                          excess reserves banks can loan as demand deposits.
                     2) When buying in the open market, increased demand from the Federal Reserve
                         pushes up prices sellers receive, lowering the effective interest sellers pay.
                 c. Selling bonds contracts the economy.
                 d. Review of
Valuing bonds
                     1) Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value
                          of $10,000. Face value is called par value.
                         a) A few years go by and you need money and one choice is to sell the bond.
                         b) If interest rates on this type bond have gone down, people will be very anxious
                              to buy, demand, will be high pushing price up and your will receive more than
                         c) If rate shave gone down, no one will give you $10,000, demand will be low,
                              so if you need the money, you will sell for less, below par.
                         d) You can hold for twenty years and get par and get the money some where else.
                     2) Therefore, interest rates and bond values (prices) go in the opposite direction,
                          if interest rates down, old bond price up because they are at the old higher rate.
                     3) This is called the interest rate risk for bonds. Other risks have to do with issuer
                          default and monetary inflation.
Federal Open Market Committee  minutes make interesting reading.
                 f.  It is the most powerful of the four tools.
                 g. Historical Note on lender of last resort type actions before there was a central
                      bank began in response to the Panic of 1837 (U.S. first great depression. source
                   1.  "The Secretary of the Treasury, Salmon P. Chase, bought $13.5 million in
                          National 5-20 bonds, but this tepid government response did little
                          to calm the markets (Juglar 95)."   Tepid response would be used to describe
                          FED actions during Great Recession.
                   2. "The New York Clearing House had two tools at its disposal for combating
                         banking panics and liquidity crises, in the form of loan certificates and
                         reserve pooling."
           3. Discount rate
               a. This is the rate charged by the Federal Reserve for loans to member banks.  
               b. It strongly affects the prime interest rate paid by a bank's best customers.
                   1) Lower the rate to expand economy as interest rates decrease.
                   2) Raise the rate to contract economy as interest rates increase.
                   3) Another important interest rate is the federal funds rate which is the rate at which
                       banks loan funds to each other.
           4. Term Auction Facility
             a. Initiated in 2007, it allows banks to add to their reserves at low rates.
               b Done to increase bank liquidity which was low because of a loss in
                  reserve caused by a housing crisis.
5. Adjusting to The Great Recession
How Fed Adjusted Tools to Combate Great Recession 1
How Fed Adjusted Tools to Combate Great Recession 2

        B. Qualitative controls affect the actions of market participants.
             1. Moral suasion or jawboning  
   a. This social pressure by influential people to encourage specific people to act in the
                     public interest.
                 b. It is used to influence public opinion and political attitudes.
                 c. An example is when the Chairman of Board of Governors makes his
Semiannual Report to Congress on the economy and monetary policy
             2. Margin Requirements, the down payment required on stocks which is now 50%,
                  is seldom changed.
             3. Consumer Credit Controls credit cards work so well they are seldom used.
4. The Federal Funds Rate
a. Most controllable interest rate
                 b. Targeted by monetary policy
                 c. It is the overnight interest rate banks with excess fed reserve charge
                     each banks short of fed reserve to keep the system in balance.
                 d. By controlling reserves, the fed controls this rate.
                 e. This allows them some control over short-term rates.
                 f. For more information visit Federal funds rate - Wikipedia
                 g. Taylor rule affected by Fed's  QE policies. 2/3/14
Taylor rule would have kept millions out of work (Minneapolis Fed) 1/17
                     2. A Taylor Rule for Public Debt

       C. Monetary Policy Internet Game lets you be the FED chairperson.

       D. Great Recession Brought New Tools
            1. Quantitative Easing unconventional increases the money supply
            2. Paying higher interest on bank excess reserves
                a. Limits effectiveness of excess bank reserves
                b. In creases bank liquidity of banking system             
            3. The Federal Reserve's Monetary Policy Toolkit: Past, Present, and Future

               4 Nine Facts About the  Great Recession and tools for fighting the next downturn
            5. Shrinking the FED' Balance Sheet/ 1/26/17
            6. Relying o the FED's Balance Sheet 2/25/18
       E. Summary

 affect the money supply: with required reserve, open-market
              operations, discount rate, term auction facility
              Qualitative: affect financial participation with moral suasion, margin requirements,
              consumer credit controls

       F. Reading
            1. The Brave New World of Monetary Policy SF FED explains
                policy change resulting from the Great Recession 6/6/12
            2. The Post Keynesian View-of Monetary Policy 12/10/15
            3. Are The Effects Of Monetary Policy Asymmetric? Richman Fed 3/12/17















Hope FED is Prints
the Correct Amount

Image result for Federal Reserve Tight Money Cartoons










Quantitative Easing In Focus:
The U.S. Experience - Forbes


IV Implementing Monetary Policy
A. Elements Of Monetary Policy Implementation Framework 1 of 4
     B. Counterparties And Collateral Requirements Of Implementing Monetary Policy 2 of 4
     C. How Do Central Bank Balance Sheets Change In Times Of Crisis Part 3 of 4
The Trouble With Macroeconomics centers on the failures of monetary policy
     E. FED answers fiscal policy questions
1. What is the money supply? Is it important?

2. What are the Federal Reserve's objectives in conducting monetary policy?
3. Why doesn't the Federal Reserve just buy Treasury securities directly from the U.S. Treasury?
4. Debt Monetization: Then And Now 4/14/18

       Summary: Internet articles on difficulty of implementing monetary policy

V. Effectiveness of Monetary Policy
       A. Strengths
           1. Speedy and flexible
           2. Somewhat isolated from political pressure
           3. Hard money, restrictive Federal Policy, has
               worked well recently. 


So Far So Good

Image result for Federal Reserve Tight Money Cartoons


       B. Weaknesses
           1. Easy money has not worked well.
               a. In the early 1900's, it didn't stop a recession. 
               b. Low profit expectations by business and fears
                   over possible employment loss by workers make
                   lower interest rates ineffective.
               c. Interest rate cuts in 2001 were not able to stop
                   a recession as borrowing as indicated by velocity

           2. Bank deregulation has made commercial banks a less
               important supplier of investment funds thus diminishing
               the effectiveness of monetary policy.
           3. Changes in money velocity may negate some effects
               of monetary policy.
           4. Fall in real interest rates increase demand for fixed assets.
   C. Euro Monetar Policy Failed
   D. Summary:
            Strengths: speedy, flexible, less political pressure,
                 works well controlling inflation but with pain
               Weaknesses easy doesn't spur enough growth,
                  velocity adjusts to counter reserve changes.
               Recent Effectiveness



Debt Monetization History







       E. Readings
           1. Recent Events
               a.  The Great Recession had a monetary policy miscalculation
               b. Greenspan's Ten-year Analyzed
               c. Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals
               d. Rethinking Macroeconomic Policy Conference: Ben Bernanke, Monetary Policy
                   2 hr video 10/18/17
e. The 1970s Origins of Too Big to Fail 10/18/17 update FRB of Cleveland
           2. Theory
                a. Monetary Policy Basics
                b. Monetary Policy Myths

                c. On the importance of sound money
                d. On-definitions of money critiques modern monetary policy
                e. Monetary Policy will never be the same
                f. The Zero Interest-rate Bound and Optimal Monetary Policy
                g. When Is the Government Spending Multiplier Large?
Why Treasury Secretaries Should Stick With the Strong Dollar Mantra 5/25/18           3. Learning tools from European Central Bank     
   a. Monetary Policy Game from the
b. Inflation Island another learning tool from ECB.
c. Disagreement and  Monetary Policy 10/30/17
        4. History
a. What Caused the Recession of 1937  Global Economic Intersection 8/212/13
                 Editors note: After WWI much of Europe inflation cause severe
                  apprehension that existed today.  The U.S. is apprehensive concerning high
                  persistent unemployment because of  the Great Depression of 1930's.
      b. The Presidential Election Cycle Theory and the FED
c. 1994 FED Pre-emptive Inflation Strike Drew Controversy
d. Action to Stop Past Recessions, NYT 1p
The New Monetary Accord No One’s Talking About
Recent Currency Manipulations 4/25/16


       VI. Modern Monetary Policy
Basics from Modern Monetary Theory
                 1. monetarily sovereign government is the monopoly supplier
                 2. government has an unlimited capacity to pay for the things
                 3. government has an unlimited ability to fund other sectors
                 4. insolvency and bankruptcy of this government is not possible

            B. Overview Modern Monetary Theory is an unconventional
Seven Deadly Innocent Frauds of Economic Policy - Warren Mosler pdf
1. Lecture from W. Moster 62 min video
2. Video Interview


Modern Monetary Theory Videos
Demystifying Modern Monetary Policy
What Modern Monetary Theory Tells Us About Econ Policy
Why the Elite are Living In an Economic Fantasy
Modern Money & Public Purpose
: The Historical Evolution of Money and Debt
2: Governments Are Not Households
3: The Eurozone
4. Real vs. Nominal Economy
The Other Side of the Story

MMT vs. Austrian School Debate

Minsky, Inequality, and the Monetary:Fiscal Policy Outlook

VII. QE2 Keeps Money Loose Readings
     A . What is Fed's QE2
          1. Intended or Unintended consequences?
          2. For more read
Good Losers from 5/7/11 Economist Magazine
      B. European MonetaPolicy 3/31/11
  C. The Case for ending QE2 early 4/12/11
     D. USB- US Monetary Policy Normalizing Near after helping Japan. 4/11
     E. Buttonwood, Forty yeas on from 8/11 of Economist Magazine
     F. The fed is not printing money Seeking Alpha 3/19/13
     G. The fed isn't stupid the market is understanding monetary policy
     H. Bond Vigilantes try to control federal borrowing
     I.  Paul Krugman changed his mind on bond vigilantes 2012-12
     J. comments with video on Fed and QE2 6/17/13
     K. Why 2014 could be ugly a look at the-fed
     L. Keynesian myths-central planning and the triumph of the warfare state
     M.  Japan Reflation Update
     L. Dollar Joins Currency Wars by Nouriel Roubini 2015-05
    M. Understanding the "Exorbitant Privilege" of the U.S. Dollar
Bernanke: "People Would Be Stunned To Know The Extent To Which The Fed Is Privately Owned"

VIII.  Macro Video S from ACDC Leadership 6/19/13

Practice Quizzes amosweb practice test questions by specific topic
money creation, answers provided
Monetary Policy 
practice questions, no answers provided.








In A1971 the Nixon Shock ended the partial Gold Standard for the United States.  The Vietnam War deficits had caused inflation and the dollar's loss in value  caused foreign governments to withdraw gold. Eventually high inflation resulted in OPEC and temporally high oil prices.


Easy does it
"Monetary policy is the secret ingredient to bringing down debt ratios"



Treasury Using the FED Took on the Additional Debt


Wall Street's Brightest Minds Reveal the Most Important Charts in the World


Competition For Funds Will Be Intense


Will Inflation Follow



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