Week 10 — Monetary Policy Report: The Fed's Tools and the Interest Rate — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 9 of the term — work four short money-market problems, explain what each figure means, and tell a cousin what a central-bank bond sale does and does not mean for her loan.

This week you learned the Federal Reserve's structure and goals, the four tools and which way each moves the money supply, and how money demand and a vertical money supply set the equilibrium interest rate. In Week 3 you computed the unemployment rate and the inflation rate, in Week 5 you learned to tell a movement along a curve from a shift, and in Week 9 you used the money multiplier to turn a monetary base into a money supply. In this assignment you work four short problems, interpret each one, and explain to a cousin what a central-bank bond sale does and does not mean for her loan. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles.

The task

This report uses the week's illustrative numbers, constructed for this course and not real data: a banking system with a monetary base of 105 dollars and a required reserve ratio of 0.10, a money market where money demand is 1,200 minus 25 times the interest rate, a bond sale that lowers the base to 100 dollars, and Week 3's labor market of 6 unemployed people out of a labor force of 120 (both in millions).

Work these four problems, showing every step on its own line:

1. In the illustrative banking system, the monetary base is 105 dollars and the required reserve ratio is 0.10. What is the money supply, in dollars?
2. In the illustrative money market, money demand is 1,200 minus 25 times r, where r is the interest rate in percent, and the money supply is 1,050 dollars. What is the equilibrium interest rate, in percent?
3. In the same illustrative money market, the central bank sells bonds and the monetary base falls from 105 to 100 dollars, with the required reserve ratio still 0.10. What is the new equilibrium interest rate, in percent?
4. In the illustrative labor market behind the dual mandate, 6 people are unemployed out of a labor force of 120 (both in millions). What is the unemployment rate, in percent?

Beside each figure, add one brief interpretation in plain words. For problem 1, say what the money supply means, and why the spending multiplier, 1 divided by (1 minus the MPC), does not answer this question. For problem 2, say what the equilibrium interest rate means, and why money demand slopes down. For problem 3, say what the new interest rate means, name the line that shifts and its direction, and explain why the change in the rate is a movement along money demand rather than a shift of it. For problem 4, say which goal of the dual mandate the unemployment rate tracks, then compute the inflation rate for a price index that rose from 100 to 108 and name the goal it tracks.

Explain it to a non-expert

Your cousin runs a small bakery and has a loan for a new oven. She hears on the radio that the central bank sold bonds, and asks whether that means the government cut its spending and whether her loan could get more expensive. Write a 3–5 sentence message your cousin could follow: that this was the central bank, not the lawmakers who set the budget; what selling bonds does to the money supply and the interest rate in everyday words; and one honest limit, such as the fact that this course's money market is a simple model and her own loan rate depends on more than one decision. Explain any technical term in everyday words. More than one good limit can be defended.

For a different, ungraded example, imagine a friend who hears that her credit union raised the rate it pays on savings and asks whether the city council decided it. Model message: "The credit union sets its own savings rate; the city council has nothing to do with it. A higher rate means every 100 dollars you leave in savings earns a little more over a year. That also makes keeping extra cash in checking, where it earns nothing, a bit more costly by comparison. The announcement does not tell you how long the higher rate will last."

Use that pattern for the central bank's bond sale, with your own explanation.

Here is one honest note about scope: every number in this assignment is illustrative, so do not add a real interest rate, money-supply figure, or unemployment rate from the news. The classroom money multiplier is an upper bound, and required reserve ratios have been zero since March 2020, which is why this report keys only on the model's numbers.

How to work

1. Draft all four figures, the four brief interpretations, and your message for your cousin.
2. Check your draft against the attached scoring criteria, criterion by criterion: is the money multiplier used for the money supply, does each bond sale or purchase move the money supply in the right direction, is the rate change read as a movement along money demand, and is every figure explained in plain words?
3. Revise at least one calculation or explanation, and write two or three sentences on what you changed and why.

Deliverables

Submit your monetary policy report with all four figures, their brief interpretations, your message for your cousin, and your two or three sentences on the revision. You may submit it written, recorded as audio or video with a transcript, or as a labelled sketch of the money market with a short note; every form is graded by the same scoring criteria.

Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

The calculations, reasoning, and explanations must be your own work. This version is built to be completed without any AI tool, and no part of it requires one. Use the chapter, your notes, and a calculator, and show every step so your work can be checked. Do not copy another student's figures or wording.

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