Chapter 26 - Monetary System Flashcards
What is the money multiplier formula?
1/r
Total reserves =
required reserves + excess reserves
Required reserves =
Reserve ratio x Deposits
Deposits =
Total reserves
Name 3 factors that affect demand of money:
1) Price level (increase price level => increase demand)
2) Real GDP (increase GDP => increase demand)
3) Financial technology (increase financial tech => decrease demand)
Name 3 factors that can affect the supply of money, and the slope of the curve:
1) Monetary base (Upward sloping graph)
2) Nominal interest rate (horizontal graph)
3) QTY of money (Vertical line)
Explain how targetting the monetary base affects supply of money:
Open market purchases increase the supply of money
Open market sales decrease supply of money
Describe how the nominal interest rate affects supply of money:
Increase demand => open market purchase => increase in supply of money (Prevents interest rate increase)
Decrease demand => open market sale => decrease in supply of money (Prevents interest rate decrease)
Show how targetting the quantity of money affects the supply of money:
1) Increase demand => open market sale => decrease monetary base (Keeps qty of money on target)
2) Decrease demand => open market purchase => increase monetary base (Keeps qty of money on target)
When monetary base/qty of money is targetted, when is equillibrium of the money market?
QTY money demanded = QTY money supplied
When is the money market in long-run equillibrium?
Inflation rate = expected inflation rate
Real GDP = Potential GDP
What is the short run effect of changing the qty of money?
Increase QTY of money => Money surplus => increased supply of money=> decreased interest rate
Decreased QTY of money => money shortage => decreased supply of money=> increased interest rate
