Question

In the transmission of monetary policy, what is the difference between inside money and outside money? How does the Federal Reserve try to control the amount of inside money? How can this regulatory position create a cost for depository institutions?

a) Inside money is physical currency, outside money is electronic, control through interest rates, creates cost through reduced profit margins
b) Inside money is electronic, outside money is physical currency, control through reserve requirements, creates cost through increased interest rates
c) Inside money is physical currency, outside money is reserves, control through open market operations, creates cost through reduced lending
d) Inside money is reserves, outside money is electronic, control through interest rates, creates cost through increased regulatory scrutiny

Answer 1

Inside money is physical currency and outside money is reserves. The Federal Reserve controls inside money through open market operations. This regulatory position can create costs for depository institutions.

Step-by-step explanation:

Inside money refers to physical currency, while outside money refers to reserves held by depository institutions. The Federal Reserve controls the amount of inside money through open market operations, which involve buying or selling government bonds. By buying bonds, the Federal Reserve increases the amount of inside money in circulation, while selling bonds reduces it. This regulatory position can create a cost for depository institutions as it affects their ability to lend and their profit margins.