All Flashcards
What is the impact of lowering the reserve requirement on the money supply?
Increases the money supply.
What is the impact of raising the discount rate on the money supply?
Decreases the money supply.
What is the impact of the Fed buying bonds on the nominal interest rate?
Decreases the nominal interest rate.
What is the impact of the Fed selling bonds on the nominal interest rate?
Increases the nominal interest rate.
How does easy monetary policy affect aggregate demand?
Increases aggregate demand by lowering interest rates and increasing investment.
How does tight monetary policy affect aggregate demand?
Decreases aggregate demand by raising interest rates and decreasing investment.
What is the effect of increasing the money supply on investment demand?
Increases investment demand due to lower interest rates.
What is the effect of decreasing the money supply on investment demand?
Decreases investment demand due to higher interest rates.
What is the Fed's primary tool for conducting monetary policy?
Open market operations.
How does the Fed influence the federal funds rate?
Through open market operations.
What is the goal of expansionary monetary policy during a recession?
To lower interest rates, stimulate investment, and increase aggregate demand.
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.
Define nominal interest rate.
Real interest rate + expected inflation rate.
Define the demand for money.
The quantity of money people want to hold at various interest rates.
Define the money supply.
The total amount of money in circulation in an economy.
Define reserve requirement.
The fraction of deposits banks must hold in reserve.
Define discount rate.
The interest rate at which commercial banks can borrow money directly from the Fed.
Define open market operations.
The Fed buying and selling government bonds to influence the money supply.
Define federal funds rate.
The target rate the Fed wants banks to lend to each other overnight.
Define money market equilibrium.
The point where money demand equals money supply, determining the nominal interest rate.
Define investment demand.
The amount of investment spending firms want to make.
Define easy monetary policy.
Increasing the money supply to lower interest rates and stimulate the economy.
Define tight monetary policy.
Decreasing the money supply to raise interest rates and slow down the economy.