All Flashcards
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.
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.
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.