What is the difference between the nominal interest rate and the real interest rate?
Nominal = Real + Expected Inflation. Real is adjusted for inflation; nominal is not.
Differentiate between movement along the money demand curve and a shift of the curve.
Movement is caused by changes in the nominal interest rate. Shifts are caused by other factors (price level, GDP, etc.).
Compare and contrast easy and tight monetary policy.
Easy policy increases money supply, lowers rates. Tight policy decreases money supply, raises rates.
What is the difference between the discount rate and the federal funds rate?
Discount rate is what the Fed charges banks; federal funds rate is what banks charge each other.
Compare the effects of an increase in price level vs. an increase in real GDP on money demand.
Both shift the money demand curve to the right, increasing nominal interest rates.
Differentiate between the money market and the loanable funds market.
Money market focuses on short-term interest rates and money supply; loanable funds market focuses on long-term interest rates and savings/investment.
Compare the effects of buying vs. selling government bonds by the Fed.
Buying bonds increases the money supply and lowers interest rates; selling bonds decreases the money supply and raises interest rates.
Differentiate between monetary policy and fiscal policy.
Monetary policy is controlled by the central bank, while fiscal policy is controlled by the government.
Compare the effects of increasing vs. decreasing the reserve requirement.
Increasing the reserve requirement decreases the money supply; decreasing the reserve requirement increases the money supply.
What is the difference between the quantity of money demanded and the demand for money?
Quantity of money demanded is a point on the curve at a specific interest rate. Demand for money is the entire curve.
Compare the impact of a change in interest rates on money demand vs. investment demand.
An increase in interest rates decreases the quantity of money demanded and decreases investment demand.
What does a vertical money supply curve indicate?
The money supply is independent of the nominal interest rate.
On a money market graph, what determines the equilibrium nominal interest rate?
The intersection of the money demand and money supply curves.
What happens to the nominal interest rate when the money supply curve shifts right?
The nominal interest rate decreases.
What happens to the nominal interest rate when the money demand curve shifts right?
The nominal interest rate increases.
Illustrate the impact of the Fed buying bonds on the money market graph.
Rightward shift of the money supply curve, decreasing the nominal interest rate.
Illustrate the impact of increased price level on the money market graph.
Rightward shift of the money demand curve, increasing the nominal interest rate.
What happens to the money supply curve if the Fed increases the reserve requirement?
The money supply curve shifts to the left.
What happens to the money supply curve if the Fed sells bonds?
The money supply curve shifts to the left.
Illustrate the impact of decreased transaction costs on the money market graph.
Leftward shift of the money demand curve, decreasing the nominal interest rate.
What does the intersection of money demand and money supply represent?
The equilibrium nominal interest rate and quantity of money.
How is the money market affected by an increase in real GDP?
Money demand curve shifts right, increasing the nominal interest rate.
How does an increase in the price level affect money demand?
Increases money demand, shifting the curve to the right.
How does increased access to ATMs affect money demand?
Decreases money demand, shifting the curve to the left.
How does the Fed use open market operations to lower the federal funds rate?
The Fed buys government bonds, increasing the money supply.
How does a decrease in the discount rate affect the money supply?
Increases the money supply as banks borrow more from the Fed.
How does an increase in real GDP affect the demand for money?
Increases the demand for money, shifting the curve to the right.
How does a recession influence investment demand?
Decreases investment demand due to lower expected returns and uncertainty.
How does expected inflation impact the nominal interest rate?
Increases the nominal interest rate.
How does an increase in the nominal interest rate affect the quantity of money demanded?
It decreases the quantity of money demanded.
How does easy monetary policy impact investment?
It increases investment by lowering interest rates.
How does tight monetary policy impact investment?
It decreases investment by raising interest rates.
How does a change in the nominal interest rate affect the money demand curve?
Causes movement *along* the money demand curve, not a shift *of* the curve.
