REVIEW QUESTIONS

1. Define monetary base. How does the monetary base differ from the money supply?

2. What is the effect on the monetary base of an open­market purchase of U.S. Treasury securities? What is the effect on the money supply?

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4. Besides open-market operations, what other means does the Federal Reserve have for controlling the money supply? Explain how these alternative methods work.

5. Besides open-market operations, what other means does a central bank like the European Central Bank use to control the money supply? Explain how these alternative methods work.

6. Describe how the federal funds rate is determined in a regime of abundant reserves.

7. Describe the main sources of uncertainty that affect monetary policymakers and give an example of each.

8. Define the main tools the Fed used in the Great Recession to avoid problems caused by the zero lower bound.

9. “It is plain to see that discretion is a better way to run monetary policy than following a rule because a policy of discretion gives the central bank the ability to react to news about the economy." What is the monetarist response to this statement? What is the more recent argument for using rules rather than discretion?

10. Describe the Taylor rule. What are the variables that determine the recommended interest rate according to the rule? How has the rule performed historically?

11. How does the use of inflation targeting improve cen­tral bank credibility? What is the main disadvantage of inflation targeting?

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