All Flashcards
How does inflation affect the store of value function of money?
Inflation erodes the purchasing power of money, reducing its effectiveness as a store of value.
If the nominal interest rate is 5% and expected inflation is 2%, what is the real interest rate?
3% (Real Interest Rate = Nominal Interest Rate - Expected Inflation Rate)
How does an increase in the price level affect the demand for money?
It increases the demand for money because people need more money to conduct transactions.
How does the FED use open market operations to combat inflation?
The FED sells government bonds, decreasing the money supply and increasing interest rates, which cools down the economy.
How does an increase in real GDP affect the demand for money?
It increases the demand for money because there are more transactions occurring in the economy.
How does a decrease in the reserve requirement affect the money supply?
It increases the money supply because banks can lend out a larger portion of their deposits.
How does an increase in the discount rate affect borrowing?
It discourages borrowing by banks, leading to a contraction in the money supply.
How would the purchase of bonds by the FED affect the money supply?
The money supply would increase.
How does increased investor confidence affect the loanable funds market?
It increases the demand for loanable funds as businesses seek to expand, potentially raising real interest rates.
How does increased government borrowing affect the loanable funds market?
It increases the demand for loanable funds, potentially raising real interest rates and crowding out private investment.
How do transaction costs affect the demand for money?
Lower transaction costs decrease the demand for money.
Analyze the effect of an increase in the price level on the money market graph.
The money demand curve shifts right, increasing the nominal interest rate.
Analyze the effect of the FED buying bonds on the money market graph.
The money supply curve shifts right, decreasing the nominal interest rate.
Analyze the effect of increased savings on the loanable funds market graph.
The supply curve shifts right, decreasing the real interest rate.
Analyze the effect of increased borrowing on the loanable funds market graph.
The demand curve shifts right, increasing the real interest rate.
What does a vertical money supply curve indicate?
The money supply is independent of the interest rate and is controlled by the FED.
What happens to the money demand curve if real GDP increases?
The money demand curve shifts to the right.
What happens to the money supply curve if the FED increases the reserve requirement?
The money supply curve shifts to the left.
On a money market graph, what does the intersection of money supply and money demand represent?
The equilibrium nominal interest rate.
On a loanable funds market graph, what does the intersection of supply and demand represent?
The equilibrium real interest rate.
Analyze the effect of a decrease in transaction costs on the money market graph.
The money demand curve shifts left, decreasing the nominal interest rate.
Analyze the effect of the FED selling bonds on the money market graph.
The money supply curve shifts left, increasing the nominal interest rate.
What are the differences between nominal and real interest rates?
Nominal interest rate is the stated rate, while real interest rate is adjusted for inflation.
What are the differences between M1 and M2?
M1 is the most liquid money, while M2 includes M1 plus less liquid assets like savings accounts.
What are the differences between the money market and the loanable funds market?
The money market deals with nominal interest rates and the money supply, while the loanable funds market deals with real interest rates and savings/investment.
What are the differences between monetary and fiscal policy?
Monetary policy is controlled by the central bank, while fiscal policy is controlled by the government.
What is the difference between the discount rate and the federal funds rate?
The discount rate is the rate the Fed charges banks, while the federal funds rate is the rate banks charge each other.
Compare and contrast reserve requirements and open market operations as tools of monetary policy.
Both affect the money supply, but reserve requirements directly change bank lending capacity, while open market operations involve buying/selling government bonds.
Compare and contrast the functions of money as a medium of exchange and a store of value.
As a medium of exchange, money facilitates transactions. As a store of value, money allows people to defer consumption into the future.
What is the difference between the short-run and long-run effects of expansionary monetary policy?
In the short-run, it can lower unemployment and increase output. In the long-run, it can lead to inflation.
What is the difference between the supply of money and the demand for money?
The supply of money is determined by the FED, while the demand for money is influenced by factors like price level and real GDP.
What is the difference between assets and liabilities on a bank balance sheet?
Assets are what the bank owns (e.g., loans), while liabilities are what the bank owes (e.g., deposits).
What is the difference between saving and investment in the loanable funds market?
Saving is the supply of loanable funds, while investment is the demand for loanable funds.