Introduction to Finance

102
CHAPTER 
5
Policy Makers and 
the Money Supply
L E A R N I N G O B J E C T I V E S
After studying this chapter, you should be able to do the following:
LO 5.1
Describe the U.S. national economic policy objectives and possible confl icts among 
these objectives.
LO 5.2
Identify the major policy makers and describe their primary responsibilities.
LO 5.3
Discuss how the U.S. government infl uences the economy and how the government 
reacted to the 2007–09 perfect fi nancial storm.
LO 5.4
Describe the U.S. Treasury’s cash and general management responsibilities.
LO 5.5
Describe the U.S. Treasury’s defi cit fi nancing and debt management responsibilities. 
LO 5.6
Discuss how expansion of the money supply takes place in the U.S. banking system.
LO 5.7
Summarize the factors or transactions that aff ect bank reserves.
LO 5.8
Explain the terms monetary base, money multiplier, and the velocity of money and 
their relationships to the money supply.
W H E R E W E H A V E B E E N . . .
In Chapter 4 we discussed the role of the Federal Reserve System as the central bank in the 
U.S. banking system. Money must be easily transferred, checks must be processed and 
cleared, banks must be regulated and supervised, and the money supply must be controlled. 
The Fed either assists or directly performs all of the activities that are necessary for a 
well-functioning fi nancial system. You also learned about the characteristics and require-
ments of Federal Reserve membership and the composition of the Fed Board of Governors. 
You were introduced to the Fed’s monetary policy functions—its open-market operations, 
the administration of reserve requirements, and the setting of interest rates on loans to depos-
itory institutions. Fed supervisory and regulatory functions were also discussed.