Question

“The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base.” Is this statement true, false, or uncertain? Explain.

Answer 1

The above statement is false.

The Federal Reserve is capable of controling the amount of the monitory base only upto a certain extent, through quantitative monitory tools like open market operations, interest rates etc. but it is finally on the banks to decide that how much reserves they want to hold and how much to borrow from the Federal Reserve. Thus the word 'Perfectly' is wrong.

The monitory base is actually the total money in circulation plus the total deposits held with the scheduled commercial banks, so it is on the hands of people to decide that how they wanted to hold there money with respect to there deposits.