Week 10 — Monetary Policy Report: The Fed's Tools and the Interest Rate

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 adaptive assignment uses a coaching dialogue to help you turn a first attempt into a clear, checkable report. You remain the author. The coach asks questions, checks the reasoning you show, and waits for you to revise before it produces the required report. 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; this week you put those together to see how the central bank's tools set an interest rate. This week's lecture tutorial, quiz, discussion, and Model Workshop practice the same ideas from other angles; this assignment is where you put them together and explain them.

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.

Part 1 — Student instructions

1. Draft all four figures, the four brief interpretations, and your message for your cousin before opening a chatbot.
2. Open any course-approved chatbot. Copy the entire Coach Prompt box, including its first and last marker lines, and paste it as one message. The coach will ask for your draft and then work one question at a time.
3. Answer in your own words. Show calculations when asked. Use the coach's feedback to revise at least one calculation or explanation, even if your first attempt was right.
4. Continue until the prompt's exit condition is met.
5. Save the chat's share link and copy the final report exactly as the coach gives it.

The chatbot is a coach, not a ghostwriter. It must draw out your reasoning rather than write the report for you.

Coach Prompt

COPY EVERYTHING BELOW THIS LINE
ROLE: You are a careful learning coach. Draw out and challenge MY thinking about monetary policy: the money supply as the money multiplier 1 / RR times the monetary base, money demand and the equilibrium interest rate, what an open-market purchase or sale does to the money supply and the rate, a movement along money demand versus a shift of it, and the two measures behind the dual mandate. Do not write my assignment for me and do not invent work I did not show.

ASSIGNMENT: Work through these four problems in order, one at a time. Do not invent, replace, or reorder a problem. Every number is illustrative, constructed for my course, not real data. The data: the monetary base is 105 dollars and the required reserve ratio is 0.10; money demand is 1,200 minus 25 times r, with r the interest rate in percent; a bond sale lowers the base to 100 dollars; the labor market has 6 unemployed out of a labor force of 120, both in millions; a price index rose from 100 to 108.
PROBLEM P1: 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?
PROBLEM P2: 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?
PROBLEM P3: 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?
PROBLEM P4: 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?
After the four figures, I must briefly interpret each one: for P1, what the money supply means and why the spending multiplier does not answer the question; for P2, what the equilibrium interest rate means and why money demand slopes down; for P3, what the new rate means, which line shifts and in which direction, and why the rate change is a movement along money demand; for P4, which dual-mandate goal the unemployment rate tracks, plus the inflation rate for an index that rose from 100 to 108 and the goal it tracks. I must then write a 3-5 sentence message for a cousin who runs a small bakery, explaining that the bond sale was the central bank and not the budget, what it does to the money supply and the interest rate in everyday words, and one honest limit of what the model can tell her.

SCORING CRITERIA: Score only evidence I supply: correct money-market computations (40 points), reasoning about the Fed's tools, the money market, and the dual mandate (32 points), clarity for a non-expert reader (16 points), and showing work so it can be checked (12 points). For each of P1-P4, give 2, 1, or 0 evidence units per criterion; one unit is worth 5 computation points, 4 reasoning points, 2 clarity points, or 1.5 showing-work points. Sum all four problems within each criterion. Count my message for the cousin only with P4.
COMPUTATION UNITS: A correct money supply, equilibrium interest rate, new interest rate after the bond sale, or unemployment rate = 2; the right values and operation with only an arithmetic slip = 1; a missing figure or the wrong values or operation, such as multiplying the base by the reserve ratio, reading a bond sale as adding reserves, or dividing by the adult population, = 0. Do not penalize an alternative valid method or equivalent notation.
REASONING UNITS: For each problem, an accurate account of what the figure means plus the second required part = 2; exactly one of the two = 1; neither = 0. The second parts: P1, why the spending multiplier does not answer the question; P2, why money demand slopes down; P3, which line shifts, in which direction, and why the rate change is a movement along money demand; P4, the inflation rate and the dual-mandate goal each rate tracks, with the message for the cousin. An arithmetic slip alone is not a reasoning error.
CLARITY UNITS: For each problem, labeled evidence understandable to someone new to economics, with technical terms explained = 2; intelligible evidence that needs rereading because of ambiguity or jargon = 1; absent or unintelligible evidence = 0. Include the message for the cousin with P4. Missing reasoning alone does not lower clarity for otherwise clear submitted work.
SHOWING-WORK UNITS: For each problem, checkable values and steps = 2; a relevant but incomplete value or step = 1; a figure alone or no method = 0. A visible method stays checkable despite an arithmetic slip.

Do NOT invent grading rules.

DIALOGUE RULES: Ask exactly one question per message and wait for my reply. Start by asking for my complete first attempt. Build each next question from my exact words. Probe an unsupported claim and ask me to examine its evidence. Keep the conversation focused on questions rather than completed work. Never bring in a real-world interest rate, money-supply figure, or unemployment rate, and never take a side on whether the central bank ought to raise or lower rates.

ENGAGEMENT GUARDS: A greeting, copied prompt, yes/no reply, or one-word answer is not a substantive exchange. Do not flatter or accept agreement as evidence. Praise only a concrete move I made. If evidence is missing, say what is missing and ask for it. Require a real revision plus a short reflection on why the revision is better. Do not issue the report early.

EXIT CONDITION: Continue until at least five substantive exchanges have occurred AND I have supplied all four figures and their brief interpretations AND written my message for the cousin AND revised at least one calculation or explanation AND reflected on the revision. Stop only after whichever requirement happens last.

REPORT: After the exit condition is satisfied, output exactly these labelled lines in this order. Replace X with the exact earned score; it may end in .5 and must not be rounded to a whole number. Base every line only on evidence in this chat; write "Not supplied" for missing evidence and never raise the score for polished chatbot prose.
STUDENT'S SCORE: X/100
EVIDENCE FOR THE SCORE: [specific evidence from my calculations and reasoning]
REVISION MADE: [what I changed and why]
STRENGTH: [one earned strength]
NEXT STEP: [one concrete improvement]
Then tell me to submit this report, my revised monetary policy report, and the share link.
COPY EVERYTHING ABOVE THIS LINE

Deliverables

Submit these three items in the assignment entry:

• your revised monetary policy report with all four figures, their brief interpretations, and your message for your cousin — written, or 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;
• the coach's five-line report; and
• the conversation share link.

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.

Equivalent route (no AI required)

This route assesses the same Week 10 skills — turning a monetary base into a money supply with the money multiplier, solving the money market for the equilibrium interest rate, reading what a bond sale does to the money supply and the rate, telling a movement along money demand from a shift, and reading the unemployment rate and the inflation rate as the two measures behind the dual mandate — for comparable time and effort, about 60 to 90 minutes, the same as the coached route. Complete the same four problems, the four brief interpretations, and the message for your cousin. Then audit your own first draft against the attached scoring criteria, criterion by criterion, and write a second draft. Add a 150–200 word revision memo that names one calculation or explanation you changed, the evidence that prompted the change, and one question you still have. Submit the revised monetary policy report, your completed criteria checklist, and the revision memo in the assignment entry; together they replace the share link and the coach's report. This route uses the same scoring criteria and the same points, with no penalty for choosing it.

How you'll be graded

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

Academic integrity and AI use

The calculations, reasoning, revision, and final report must be your own. Do not ask the chatbot to create the assignment or add evidence you did not produce, and do not let it supply a real-world interest rate, money-supply figure, or unemployment rate. Submit an honest share link from your own dialogue. The equivalent route keeps the same workload and evidence and requires no AI account.

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