Asignment: How Money Affects the Economy

The Discussion topics deal with money, the Federal Reserve System, and the effects of money growth on the rate of inflation. The specific discussion areas include the various forms and uses of money, the roles of the Federal Reserve System, money supply, money demand, monetary policy instruments, costs of inflation, and inflation as a tax.

Respond to two of the following Discussion topics.

Topic 1: The Federal Reserve may increase or decrease money supply depending on the economic condition.

a. What policy instruments does the Fed use for the monetary policy?

b. What are the pros and cons of using expansionary and contractionary monetary policy tools under the following scenarios: depression, recession, inflation, and robust economic growth? Which do you think is more appropriate today?

Topic 2: In economics, inflation is considered as a tax. There are also various costs of inflation.

a. What is the inflation tax, and how might it explain the creation of inflation by a central bank? Explain how inflation affects savings and investment.

b. Inflation distorts relative prices. What does this mean and why does it impose a cost on the society?