Define the following terms and explain their importance to the study of macroeconomics.
a. Central bank
b. Federal Open Market Committee
c. Supply of money
d. Monetary policy
What will be an ideal response?
a. A central bank is a government institution that controls the money supply and serves as a banker for commercial banks. The central bank of the United States is the Federal Reserve System, established in 1913.b. The Federal Open Market Committee (FOMC) is made up of the 7 governors of the Board of Governors, the president of the Federal Reserve Bank of New York, and 4 presidents from the other 11 district banks. The FOMC is responsible for open-market operations (and, therefore, the most important component of monetary policy).c. The supply of money is determined by the Fed and the willingness of banks to make loans. The money supply is influenced by Fed policy that includes open-market operations, discount rate changes, and changes in required reserve ratios.d. Monetary policy is the manipulation of the money supply and interest rates by the Federal Reserve System. The principal objectives of monetary policy are stable prices and economic growth.
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Using exchange rates, it is possible to price-compare in different nations. If an iPod costs $90 in the United States and €45 in France, in which nation would you get the better deal when the dollar-euro exchange rate is $2/€?
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