All Flashcards
How does expansionary monetary policy affect nominal interest rates?
It typically lowers nominal interest rates to stimulate borrowing and investment.
How does contractionary monetary policy affect nominal interest rates?
It typically raises nominal interest rates to reduce inflation.
What is the effect of increased government spending on real interest rates?
Increased government spending can increase demand for loanable funds, potentially raising real interest rates.
How do tax incentives for savings affect the supply of loanable funds?
They increase the supply of loanable funds, potentially lowering real interest rates.
What is the impact of a government budget surplus on the market for loanable funds?
It increases the supply of loanable funds, potentially lowering real interest rates.
How does fiscal policy influence the demand for loanable funds?
Government borrowing to finance deficits increases demand; tax policies affecting investment can also shift demand.
What is the effect of quantitative easing on interest rates?
Quantitative easing typically lowers interest rates by increasing the money supply and purchasing government bonds.
How does the central bank influence nominal interest rates?
Through tools like the federal funds rate and the discount rate, influencing the cost of borrowing for banks.
What is the impact of inflation targeting on nominal interest rates?
Central banks adjust nominal interest rates to maintain the target inflation rate.
How do international capital flows affect domestic interest rates?
Inflows increase the supply of loanable funds, potentially lowering rates; outflows decrease supply, potentially raising rates.
Compare nominal interest rate and real interest rate.
Nominal is the stated rate; real is adjusted for inflation. Real reflects the true return/cost.
Differentiate between the market for loanable funds and the money market.
Loanable funds deal with long-term investments/savings; money market focuses on short-term lending/borrowing.
Compare nominal GDP and real GDP.
Nominal GDP is measured in current prices; real GDP is adjusted for inflation.
What is the difference between expected and actual inflation?
Expected inflation is the anticipated rate; actual inflation is the rate that actually occurs.
Compare the impact of unexpected inflation on borrowers and lenders.
Borrowers benefit from unexpected inflation; lenders are hurt.
Contrast the effects of expansionary and contractionary monetary policy on interest rates.
Expansionary policy typically lowers interest rates; contractionary policy typically raises them.
Compare the effects of a government budget surplus and a government budget deficit on the loanable funds market.
A surplus increases the supply of loanable funds, while a deficit increases the demand.
Differentiate between the supply and demand sides of the loanable funds market.
Savers supply loanable funds; borrowers demand loanable funds.
Compare the effects of increased consumer confidence and decreased consumer confidence on the demand for loanable funds.
Increased confidence increases demand; decreased confidence decreases demand.
Contrast the impact of increased business investment and decreased business investment on the loanable funds market.
Increased investment increases demand; decreased investment decreases demand.
What is the nominal interest rate?
The stated interest rate before accounting for inflation.
What is the real interest rate?
The interest rate after adjusting for inflation; reflects the true return on investment or cost of borrowing.
Define inflation premium.
Compensation lenders require for the expected loss of purchasing power of money over time, included in the nominal interest rate.
What is the market for loanable funds?
The market where savers (suppliers of funds) and borrowers (demanders of funds) interact to determine the interest rate.
What is the formula for nominal interest rate?
Nominal Interest Rate = Real Interest Rate + Inflation
What is the formula for real interest rate?
Real Interest Rate = Nominal Interest Rate - Inflation
What is the significance of a negative real interest rate?
Inflation is higher than the nominal interest rate, eroding savings value and making borrowing cheaper.
Define expected inflation rate.
The rate of inflation that economists and lenders anticipate will occur in the future, used to set nominal interest rates.
What determines the equilibrium interest rate?
The interaction of supply and demand in the market for loanable funds, factoring in expected inflation.
What is the relationship between nominal and real interest rates?
The nominal interest rate includes the effect of inflation, while the real interest rate shows the true return after accounting for inflation.