Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can define monetary policy, the policy rate, and expansionary and contractionary monetary policy. (Guide: “What monetary policy is”; Practice Q1, Q3)
- I can explain the difference between a banking system with limited reserves and one with ample reserves. (Guide: “Limited reserves and ample reserves”; Practice Q4)
- I can name the four tools of monetary policy and say how each is used to expand or contract the economy. (Guide: “The tools”; Practice Q1, Q6(b), Q7(a))
- I can explain why raising the interest on reserves raises the policy rate. (Guide: “The tools”)
Calculation
- I can show an open market operation on central bank and commercial bank balance sheets. (Guide: Worked example 1)
- I can calculate the change in the monetary base and the maximum change in the money supply after an open market operation. (Guide: Worked example 1; Practice Q2, Q6(c))
- I can calculate the effect of a change in the required reserve ratio on excess reserves and the money supply. (Practice Q5)
Reasoning
- I can choose the right policy and tool for a recessionary or inflationary gap, in either banking system. (Guide: Worked example 2; Practice Q1, Q6, Q7(a))
- I can draw the reserve market for limited and ample reserves and show how a policy action changes the policy rate. (Guide: Figure 1; Practice Q4, Q7(b)–(c))
- I can explain the chain from a policy action to interest rates, investment, AD, real output and the price level, with a money market or AD–AS graph. (Guide: “From the policy rate to output and prices”, Figure 2; Practice Q3, Q6(d)–(e))
- I can explain the lags in monetary policy. (Guide: “Why monetary policy works with lags”; Practice Q7(d))
All ticked? Move on to Topic 4.7, the Loanable Funds Market study guide, or return to the course roadmap.