Economics, 11th Edition

CHAPTER 8Money Creation, Monetary Theory, and Monetary Policy

CHAPTER OBJECTIVES

• Explain the relationship between the economy's money supply and output, employment, and prices.
• Explain how money is created and destroyed through the loan-making activities of financial depository institutions.
• Show how interest rates affect borrowing from financial depository institutions and how they are influenced by changes in excess reserves.
• Define monetary policy and the major tools for carrying out monetary policy by the Federal Reserve.
• Show the relationship between government borrowing to cover deficit spending and to assess monetary policy.

For any economy, especially one that is on a paper monetary standard, careful control over the size of the money supply is extremely important. There is a strong relationship between an economy's money supply and the economy's production level, jobs, and overall price changes: Any change in the size of the money supply can change the economy's overall performance. Because of this relationship, changing the money supply is an important way to reach the economy's goals of full production and economic growth, full employment, and price stability. Monetary policy, or changing the money supply to address unemployment and inflation, is in the hands of the Federal Reserve.

You will learn a lot about how money affects the economy and the critical role interest rates play in economic activity in this chapter. You will also learn the processes for creating ...