16) In class, we discussed the concept of the Monetary Base, sometimes called MO

Question

16) In class, we discussed the concept of the Monetary Base, sometimes called MO. MO is simply the sum of two elements. What are these two elements? 17) Campbell defines the Empirical MM as the simple ratio of M1 to MO (MM: MIMO)In class, we discussed a dramatic and historic change in this ratio in the last nine years. What is the nature of this change? That is, how is the ratio different now from what it was nine years ago? 18) In class, we noted that when the Federal Government incurs a large amount of deficit spending, it is forced to finance that spending by issuing T-bonds. If the Treasury issues a large amount of new debt, that can cause interest rates on T-bonds to rise, making the government's debt problems even worse. The Fed is often helpful to the Treasury in finding a way around that consequence, by "monetizing" the debt, a process that goes by the pseudonym of "Quantitative Easing". Exactly what happens when the Fed chooses to "monetize" the debt? How is that process different from normal Open Market Operations?

Explanation / Answer

First question is answered below

16.

Monetary base or M0 is nothing but the sum of currency in hand and checkable deposits with banks. It is the most liquid form of money supply and thus contains the most liquid form of money.

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