Question

Classify each of the following as either a policy instrument or an intermediary target. Explain your answer.

a. Long-term interest rates

b. Central bank interest rates

c. M2

d. Reserve requirements

Short answer

a. The Treasury bond rate is a mid-point target for completing or achieving the desired policy outcome. It is a mid-level goal because it has no direct impact on monetary or fiscal policy.

b. The monetary base is a policy structure that is used to keep the economy's liquidity stable.

c. M1 is an intermediate goal for other policy achievements. The reason for this is that M1 governs the liquid form of currency in circulation.

d. Because these rates are used to achieve monetary policy goals, they are considered an intermediate target rather than a policy instrument.

Step-by-step solution

 Step 1 : Concept Introduction

The term "treasury bond rate" refers to the interest rates paid by investors on treasury bonds, which are debt securities with maturities of more than ten but less than thirty years.

The monetary base refers to the total amount of currency in circulation in the economy, whether with the general public or commercial banks.

M1 is a type of money supply that consists of the most liquid forms of money, such as cash and other assets that can be easily converted into liquid money.

The federal fund rate, also known as the fed rate, is the overnight rate at which banks and/or credit unions lend to various institutions. These funds are uncollateralized funds given to institutions.

Explanation Part (a)  

The Treasury bond rate is a mid-point target for completing or achieving the desired policy outcome. It is a mid-level goal because it has no direct impact on monetary or fiscal policy. Bond rate determination is an economic activity that serves as a link between several other activities. As a result, it is not a policy instrument, but rather an intermediate goal.

 Step 3 : Explanation Part (b) 

The monetary base is a policy structure that is used to keep the economy's liquidity stable. Monetary policies are designed to manage liquidity, or to keep appropriate currency in circulation, by adjusting a number of macroeconomic variables.

As a result, the monetary base is a policy instrument rather than an intermediate target.

 Step 4 : Explanation Part (c) 

M1 is an intermediate goal for other policy achievements. The reason for this is that M1 governs the liquid form of currency in circulation, which is not the only factor influencing monetary or fiscal policies.

As a result, while it can aid in achieving stability, it is not a permanent policy.

 Step 5 : Explanation Part (d) 

Because these rates are used to achieve monetary policy goals, they are considered an intermediate target rather than a policy instrument.

As a result, they are used to achieve policy objectives.