Suppose that changes in bank regulations expand the availability of credit cards so that people can hold less cash. a. How does this event affect the demand for money? b. If the Fed does not respond to this event, what will happen to the price level? c. If the Fed wants to keep the price level stable, what should it do?

The rise in the availability of credit cards profoundly impacts the demand for money. For individuals, credit cards offer flexibility to make purchases without the immediate need for cash. This change in personal finance behavior leads to a decrease in the necessity to carry large amounts of cash and, by extension, reduces the demand for physical money in circulation.

When the use of credit becomes widespread, the money that might have been sitting in people's wallets now remains in their bank accounts, causing a shift in how money is utilized within the economy. Overall cash transactions decline, with a corresponding rise in demand for credit facilities.

The Federal Reserve's interventions are critical when it comes to maintaining financial stability. When changes such as increased credit card usage cause disruptions like a drop in money demand, the Fed may step in to adjust the money supply accordingly. The Fed has several tools at its disposal, such as open market operations where it buys or sells government securities, adjusting the discount rate, and changing reserve requirements.

Fed intervention aims to prevent excessive fluctuations in the economy that could lead to a mismatch between the supply of and demand for money, causing inflation or deflation. Each action taken by the Fed is a strategic decision to influence banking activities and overall economic health.

Maintaining price level stability is a key objective of monetary policy. It ensures that the purchasing power of currency remains relatively constant over time, avoiding periods of rapid inflation or deflation. Inflation erodes the value of money, whereas deflation can lead to decreased spending and investment as consumers wait for further price falls.

Price stability allows consumers and businesses to plan for the future with more certainty, as they can predict expenses and income without the fear of unpredictable changes in the value of money. When a situation arises that might alter the money demand, such as increased credit card usage, it's essential for policymakers like the Federal Reserve to take actions that help maintain price level stability.

Monetary policy encompasses the strategies employed by a central bank, like the Federal Reserve, to control the size and rate of growth of the money supply in an economy. This is often done to achieve objectives such as controlling inflation, maintaining price stability, and fostering economic growth.

There are two types of monetary policies: expansionary and contractionary. Expansionary policy increases the money supply to reduce unemployment and avoid or end a recession. On the other hand, contractionary policy decreases the total money supply to control inflation. By adjusting the interest rates, conducting open market operations, and setting reserve requirements, the Fed manipulates the amount of money flowing through the economy to achieve its desired outcomes.