1. Questions number 1:
Explain the difference between the Money Market and the Capital Market.
In terms of the short-run functioning of the economy, which is more important? Explain.
In terms of the long-run growth of the economy, which is more important? Explain.
2. Questions number 2:
What is the "Reserve Ratio" and how is it related to total money creation?
If the Reserve Ratio is 10%, and a bank receives $10,000 in new deposits, what it the maximum amount of new money that can be created?
Why might a bank choose to hold a higher reserve ratio?
If they do hold a higher ratio, would the actual amount created be more than or less than the amount you calculated above?
3. Does a nation's Central Bank have precise control over the money supply? Why or why not?
4. Questions number 4:
Define "Open Market Operations" (OMO).
If the U.S. Federal Reserve wanted to increase the money supply, what kind of OMO would it pursue?
If the U.S. Federal Reserve wanted to decrease the money supply, what kind of OMO would it pursue?