Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Chapter 5. Policy Makers and the Money Supply

Chapter Learning Objectives:

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

• Discuss the objectives of national economic policy and the conflicting nature of these objectives.

• Identify the major policy makers and briefly describe their primary responsibilities.

• Identify the policy instruments of the U.S. Treasury and briefly explain how the Treasury manages its activities.

• Describe U.S. Treasury tax policy and debt management responsibilities.

• Discuss how the expansion of the money supply takes place in the U.S. banking system.

• Briefly summarize the factors that affect bank reserves.

• Explain the meaning of the monetary base and money multiplier.

• Explain what is meant by the velocity of money and give reasons why it is important to control the money supply.

Where We Have Been. . .

In Chapter 4 we discussed the role of the Federal Reserve System as the central bank in the U.S. banking system. Money must be easily transferred, checks must be processed and cleared, banks must be regulated and supervised, and the money supply must be controlled. The Fed either assists or directly performs all of the activities that are necessary for a well-functioning financial system. You also learned about the characteristics and requirements of Federal Reserve membership and the composition of the Fed Board of Governors. You also were introduced to the Fed's monetary policy functions—its open-market operations, the administration of reserve requirements, and ...