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Chapter 8
Honors Economics
STUDY ORGANIZER
1.
Understand the relationship between the money supply and the level of total spending and economic
activity.
2.
Identify the terms in the equation of exchange and explain the effect on output and/or prices of both an
increase and a decrease in the money supply.
3.
Explain how a financial depository institution's actual reserves, required reserves, and excess reserves
are determined.
4.
Be able to calculate a financial depository institution's required reserves and excess reserves and
understand the relationship between excess reserves and loan making.
5.
Explain when and how money is created and destroyed.
6.
Understand the money multiplier process, and the relationship between the money multiplier and the
reserve requirement.
7.
Be able to calculate the money multiplier and the change in the money supply that can result from an
initial change in excess reserves in the banking system.
8.
Explain the role of the interest rate in influencing the level of borrowing by businesses and households.
9.
Show graphically how the supply of loans, the interest rate, and the amount of actual lending are
affected by changes in excess reserves.
10.
Work through the sequence of changes in excess reserves, the interest rate, loan making, the money
supply, total spending, and economic activity for an increase and a decrease in excess reserves.
11.
Differentiate between easy and tight monetary policy.
12.
Explain how changes in the reserve requirement, the discount rate, and open market operations work to
increase or decrease excess reserves.
13.
Understand the difference between reserve borrowing by a financial depository institution from a
Federal Reserve Bank and in the Federal Funds market.
14.
Show how each of the basic tools of monetary policy could be used to fight unemployment or demandpull inflation.
15.
Understand how federal government borrowing can cause a crowding out problem.
16.
Explain the relationship between federal government borrowing, the interest rate, and monetizing the
debt.
17.
List the advantages and weaknesses of monetary policy.