5.04: Money Market Flashcards
The Price of Money
Interest rates (the opportunity to make interest from a time deposit or money market account given up when one chooses to hold money in cash or other forms of M1 liquidity)
–> What savers get “paid” and borrowers “pay”
If interest rates inc, what happens to the quantity demanded of money?
The demand will decrease
When nominal interest rates inc, the quantity of money demanded dec…
Higher return on: savings
More expensive to: borrow
When nominal interest rates dec, the quantity of money demanded inc…
Lower return on: savings
Less expensive to: borrow
A change in nominal interest rate will lead to a…
Movement along the Money Market Curve
What 3 things shift demand for money?
- Changes in income + wealth
- As income inc, MD inc
- As income dec, MD dec - Changes in inflation (Price Level)
- As inflation inc, MD inc
- As inflation dec, MD dec - Changes in technology
- As tech (ex: credit cards) improve: MD dec
What is the dual mandate of the Fed?
Price stability (low inflation) & Max employment (low unemployment/high GDP)
How does the Fed achieve its dual mandate?
Monetary policy: Using money supply to stabilize the economy
Why is the dual mandate considered a balancing act?
Inflation and employment often work in opposite directions.
What is the M1 MS a direct fn of?
The size of the MO
Through its control of the MO, the Fed also controls…
MS; Fed “controls” MS
What happens to nominal interest rates if the Fed inc MS?
NIR decrease
What happens to nominal interest rates if the Fed dec MS?
NIR increase
