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Which monetary aggregate would you expect the Federal Reserve to have the greatest control.
Explain.
Solution
Fed controls the money supply in the economy, by expanding money supply during recession
and contracting money supply during uncontrolled expansion (that leads to inflation).
In this context, Fed has highest control over M0 which is notes and coins in circulation. That's
because M0 is the most liquid form of monetary aggregate which Fed can directly control.
Starting from M1, other modes of savings are added to the aggregate, reducing their liquidity,
and Fed has no direct control over how individuals or firms save their money.

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Which monetary aggregate would you expect the Federal Reserve to hav.pdf

  • 1. Which monetary aggregate would you expect the Federal Reserve to have the greatest control. Explain. Solution Fed controls the money supply in the economy, by expanding money supply during recession and contracting money supply during uncontrolled expansion (that leads to inflation). In this context, Fed has highest control over M0 which is notes and coins in circulation. That's because M0 is the most liquid form of monetary aggregate which Fed can directly control. Starting from M1, other modes of savings are added to the aggregate, reducing their liquidity, and Fed has no direct control over how individuals or firms save their money.