Economics: Theory and Practice, 10th Edition

CHAPTER 8

Money Creation, Monetary Theory, and Monetary Policy

CHAPTER OBJECTIVES

To explain the relationship between the economy's money supply and output, employment, and prices.

To explain how money is created and destroyed through the loan-making activities of financial depository institutions.

To explain the role of the interest rate in encouraging or discouraging borrowing from financial depository institutions.

To show how interest rates are affected by changes in financial depository institutions' excess reserves.

To define monetary policy and explain the major tools for carrying out monetary policy by the Federal Reserve.

To show the relationship between government borrowing to cover deficit spending and 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 ...