CH 14

Question 1

What are two items included in Wealth? What are characteristics of each?

Answer 1

Money– No Interest, Means of Payment

Bonds– Pays Interest, Not means of Payment

Question 2

What are the three factors that affect holding wealth?

Answer 2

• -Price Level
• -Real Income
• -Interest Rate

Question 3

When there is a high Interest Rate people want to _____ Money? What does the nominal Interest rate tell us?

Answer 3

People want to SAVE money. Nominal Interest rate tell us the opportunity cost of holding money.

Question 4

What is the Money Demand Curve?

Answer 4

Total quantity of money demanded at each (nominal) interest rate. –The total amount of Wealth people want to hold as money–

Question 5

What moves ALONG the Money Demand Curve?

Which direction?

Answer 5

Change in the Interest Rate shift ALONG the curve..

• • Increase in IR moves us Leftward
• • Decrease in IR moves us Rightward

Question 6

What shifts the entire Money Demand Curve? What does this mean?

Answer 6

A change in Price Level or Real Income shifts the entire money demand curve

– At any rate, More money will be demanded–

Question 7

What is the Money Supply Curve?

Answer 7

The total quantity of money supply, the amount of money that households want to loan.

–It is a vertical line.

–(Also the quantity of money that people are holding.)

Question 8

What changes the Money Supply? Does Interest Rate make a difference?

Answer 8

The money supply stays constant until the FRS (AND FOMC) change it, Regardless of the interest rate.

Question 9

What does Money Market Equilibrium=

Answer 9

Quantity of Money Supplied= Quantity of Money Demanded

Question 10

What is the factor that moves the market towards Equilibrium?

Answer 10

The Interest Rate!

–At a higher IR, there is an excess of Money Supply causing the IR to Fall–

–At a lower IR, there is an excess of Money Demand causing the IR to Rise–

At equilibrium IR the quantity of money supplied and demanded is equal.

Question 11

There is a _________ relationship between Bond Prices and Interest Rate. Why is this so?

Answer 11

An INVERSE relationship.

This happens because when the Money Market is not at equilibrium, there is excess demand/supply of Bonds as well.

(Excess $ Supply– Excess Bond Demand)
(Excess $ Demand– Excess Bond Supply)

Question 12

How does the FRS and the FOMC Increase the interest rate?

Answer 12

An FOMC Sale– Decreasing the Money Supply, decreasing Bond Prices and Increasing IR

Question 13

How does the FRS and the FOMC decrease the interest rate?

Answer 13

An FOMC Purchase– Increasing Money Supply, Increasing Bond Prices and Decreasing IR

Question 14

What is Dynamic Monetary Policy? What is the opposite of Dynamic Monetary Policy?

Answer 14

Control/Manipulation of the Money supply to achieve an economic goal.

Defensive monetary Policy: Maintain an interest rate at a desirable level; Fight Inflation

Question 15

How does the FRS and FOMC affect GDP?

Answer 15

By FOMC Purchases or Sale

Question 16

How does the FRS and FOMC increase GDP? What is this called?

Answer 16

--Expansionary Monetary Policy--
FOMC Purchases!
Increase Money Supply (Money Multiplier)
Decrease Interest Rate
Increase A and Ip
Increase Real GDP (Expenditure Multiplier)

Question 17

How does the FRS and FOMC decrease GDP?

What is this called?

Answer 17

--Contractionary Monetary Policy--
FOMC Sale!
Decrease Money Supply (Money Multiplier)
Increase Interest Rate
Decrease A and Ip
Decrease Real GDP (Expenditure Multiplier)

Question 18

How do you calculate the Interest Rate on a Bond?

Answer 18

Interest Payment to you Over the Bond Period/

Amount you Paid for the Bond.