Chapter 26 - Money Demand and the Equilibrium Interest Rate

Question 1

interest

Answer 1

The fee that borrowers pay to lenders for the use of their funds.

Question 2

transaction motive

Answer 2

The main reason that people hold money—to buy things.

Question 3

nonsynchronization of income and spending

Answer 3

The mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses.

Question 4

speculation motive

Answer 4

One reason for holding bonds
instead of money: Because the market price of interest-bearing bonds is inversely related to the interest rate, investors may want to hold bonds when interest rates are high with the hope of selling them when interest rates fall.

Question 5

tight monetary policy

Answer 5

Fed policies that contract the money supply and thus raise interest rates in an effort to restrain the economy.

Question 6

easy monetary policy

Answer 6

Fed policies that expand the money supply and thus lower interest rates in an effort to stimulate the economy.