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Money Supply

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(a) Does the Federal Reserve have complete control over the money supply at all times? Why or why not?
(b) What is the difference between the monetary base and the money supply?

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Solution Summary

The expert examines the money supply in federal reserve. The differences between the monetary base and the money supply is determined.

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The Fed is limited by the need for accurate information, and by the way the money supply affects other parts of the economy. Without an accurate picture of how a change in interest rate will affect the amount of money in the economy, the Fed cannot maintain control. Because there is always some uncertainty in economic indicators, it can never have complete control. For example, the number of times per year a dollar changes hands for goods and services is completely independent of the money supply, and can sometimes contradict the efforts of the Fed. The Fed also need be balance growth and inflation. If unemployment is low, it cannot raise interest rates without causing inflation. This is because ...

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