Chapter 10: Monetary Policy Flashcards
What are the types of assets in which we store our wealth?
1) Monetary assets: cash and bank deposits
2) Interest-bearing, non-monetary assets: bonds, stocks etc.
Holding all else constant, an increase in _____ raises the opportunity cost of holding money
interest rate.
households and firms would like to hold more
interest-bearing assets and fewer monetary assets –> demand for money falls
An increase in the aggregate price level will shift the money demand curve to the _____
Right. Demand for money ^ (we need more money to buy same amt. of g’s&s’s
What are the four different channels of the economy affected when the BOC (central bank) changes the target for the overnight rate
1) Interest rate on other assets and loans
2) Asset prices (wealth effect)
3) Exchange rate
4) Market expectations (expected inflation..)
What is the zero lower bound problem?
Describes the situation in which the nominal interest rate cannot be lowered further because it has reached its lower bound (=zero).
The boc can lower i (exp. mon. policy) to stimulate economy/close recessionary gap.. but zero lower bound places a limit on the use of monetary policy.
What did central banks do to resolve the zero lower bound during the Great Recession
The FED and BoE purchased long term assets in attempt to lower the long-term interest rate (quantitative easing)
long-run neutrality of money
theory that a change in money supply will not have any effect on real variables such as long run real output (Yfe)
Why is money neutral in the long run?
-When aggregate prices increase, both output and input prices increase by the same proportion, so there is no REAL change in the values of goods and services. -> no change in AD
note money is not a factor in production f’n : Y=A*F(K,H,L)
quantity equation
mv = py
MS*velocity(money) = ag.Price level *RGDP
