4.5.3 Money Supply

• The central bank controls the money supply by setting interest rates and reserve requirements for commercial banks.


  True
• Match the role of the central bank and commercial banks in money creation:

  Central Bank ↔️ Sets policies to control money supply

  Commercial Banks ↔️ Create new money through lending
• Commercial banks create new money by lending activities.


  True
• Effective management of the money supply helps policymakers achieve economic goals such as price stability and economic growth
• Commercial banks adjust their lending rates based on the central bank's interest
• Higher interest rates reduce borrowing, which in turn decreases the money supply
• Order the steps in how open market operations affect the money supply:

  1️⃣ Central bank buys or sells government securities

  2️⃣ Commercial banks participate in transactions

  3️⃣ Money supply expands or contracts
• Open market operations involve buying or selling government securities in the open market.

  True
• Lower reserve requirements increase banks' ability to lend, expanding the money supply.

  True
• Methods used by central banks to control the money supply:

  1️⃣ Interest Rates

  2️⃣ Changing Reserve Requirements

  3️⃣ Open Market Operations
• Contractionary monetary policy aims to curb inflation by reducing spending and investment.


  True
• Contractionary monetary policy slows economic growth and decreases employment.

  True
• During the 2008 financial crisis, the US Federal Reserve lowered interest rates to near zero
• Quantitative easing involves purchasing government securities to inject more cash into the economy
• The money supply refers to the total amount of money available in an economy at a given time
• Commercial banks influence the money supply by creating money through their lending
• Managing the money supply is crucial for policymakers to achieve macroeconomic goals like price stability and economic growth
• Match the tools of the central bank and commercial banks in money creation:

  Central Bank ↔️ Interest rates and reserve requirements

  Commercial Banks ↔️ Lending and deposit-taking
• Order the steps in how interest rates affect money supply:

  1️⃣ Central bank adjusts interest rates

  2️⃣ Commercial banks adjust lending rates

  3️⃣ Demand for loans and deposits changes

  4️⃣ Money supply expands or contracts
• The central bank's open market operations involve buying and selling government securities to control the money supply.


  True
• Lower reserve requirements allow commercial banks to lend more, increasing the money supply.


  True
• Higher reserve requirements decrease banks' ability to lend, reducing the money supply
• Higher interest rates reduce the money supply by decreasing commercial bank borrowing
• When the central bank buys securities, it injects cash into the economy, increasing the money supply
• An expansionary monetary policy can lead to inflation if the money supply grows too rapidly
• Match the monetary policy with its effect on inflation:

  Expansionary monetary policy ↔️ Increases inflation

  Contractionary monetary policy ↔️ Decreases inflation
• Expansionary monetary policy stimulates economic growth by increasing consumer spending and business investment
• Lowering interest rates increases the money supply by making borrowing cheaper.


  True