Chapter 15: Monetary Policy

Question 1

short term interest rate

Answer 1

interest rate on financial assets that mature within 6 mos or less

Question 2

long term interest rate

Answer 2

interest rate on financial assets that mature a number of years into the future

Question 3

money demand curve

Answer 3

graphical representation of relationship between the interest rate and the quantity of money demanded. Curve slopes downward because, other things equal, a higher interest rate increases the opportunity cost of holding money

Question 4

liquidity preference model of the interest rate

Answer 4

model of the market for money in which the interest rate is determined by the supply and demand for money

Question 5

target federal funds rate

Answer 5

the Fed Res’s desired level for the federal funds rate. The Fed Res adjusts the money supply through the purchase and sale of treasury bills until the actual rate = desired rate

Question 6

expansionary monetary policy

Answer 6

policy that, through the lowering of the interest rate, increases aggregate demand and therefore output

Question 7

contractionary monetary policy

Answer 7

policy that, through the raising of the interest rate, reduces aggregate demand and therefore output

Question 8

Taylor rule for monetary policy

Answer 8

rule for setting the federal funds rate that takes into account both the inflation rate and the output gap

Question 9

inflation targeting

Answer 9

occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

Question 10

monetary neutrality

Answer 10

• in the long run, changes in the money supply affect the aggregate price level but not real GDP or the interest rate
• concept that changes in the money supply have no real effect on the economy, so monetary policy is ineffectual in the long run.

Question 11

Shifts of real money demand curve

Answer 11

changes in:
aggregate price level
real GDP
technology
institutions

Question 12

Rise in money demand

Answer 12

• shifts money demand curve to the right

* quantity of money demanded rises at any given interest rate

Question 13

Fall in money demand

Answer 13

• shifts the MDC to the left

* quantity of money demanded falls at any given interest rate

Question 14

Equilibrium interest rate

Answer 14

• there is only one interest rate paid on nonmonetary financial assets (short and long run)
• acc to Liquidity preference model, interest rate is deter by supply and demand of money
• Money supply curve shows how the nominal quantity of $ varies with the interest rate

Question 15

Effect of increase in Money supply by Fed Res

Answer 15

lowers the interest rate

Question 16

Increase in money supply

Answer 16

*generates a positive short run effect but no long run effect, on real GDP