12.1: Money and Inflation

Question 1

• Monetary policy - actions taken by a nation’s … … to affect aggregate … and … through changes in bank reserves, reserve requirements, or its target interest rate.

Answer 1

• Monetary policy - actions taken by a nation’s central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rate.

Question 2

• Fiscal policy - the use of … and … spending to affect the level of aggregate expenditures.

Answer 2

• Fiscal policy - the use of taxes and government spending to affect the level of aggregate expenditures.

Question 3

Money multiplier:

Answer 3

New deposit / Reserve requirement = how much money will be created

Question 4

• Reserve requirement - the requirement for banks to hold reserves in proportion to the size of deposits.

Question 5

Quantity theory of money - asserts that … … (in money terms) is proportional to the … of …

Answer 5

Quantity theory of money - asserts that total spending (in money terms) is proportional to the quantity of money.

Question 6

Quantity equation of exchange - expression describing the amount of money used to purchase all goods and services in an economy:

Answer 6

M × V = P × Y

Question 7

• Fisher effect - the thesis that the real rate of interest in an economy is … over time so that changes in … interest rates are the result of changes in … inflation.

Answer 7

• Fisher effect - the thesis that the real rate of interest in an economy is stable over time so that changes in nominal interest rates are the result of changes in expected inflation.

Question 8

Fisher effect formula:

Answer 8

Rnom = Rreal + π^e