ECON CH 11 Flashcards
monetary policy
is the manipulation of MS by the Fed
interest
is the price that borrowers pay to lenders for the use of their funds (savings)
interest rate
also known as “the price of money” or the “opportunity cost of holding cash” and is calculated as the annual interest rate payment on a loan expressed as a % of the loan
interest payment received per year/ amount of the loan X100
interest rate equation
households and firms
the demand for money in the economy is the demand for M1 type of money (currency+deposits) by who
liquidity
the demand for money in the economy is the demand for what
transaction motive
people need liquidity to buy things (money)
the speculation motive
people want their assets (wealth) to grow over time (bonus)
trade-off
there is a —————between liquidity of money and the interest payments offered by interest-bearing securities (such as bonds)
money demand
the relationship between interest rate and quantity of money demanded
when interest rates are high
demand for bonds is likely to be high thus the quantity of MD is likely to be low
when interest rates are low
demand for bonds is likely to be low thus the quantity of MD is likely to be high
negative
there is a ——- relationship between interest rate and quantity of MD
interest rate
the quantity of MD depends on what
changes
the demand for money shifts when the total dollar volume of transactions does what
total dollar volume of transactions
Y x P
MD curve shifts to the right
when aggregate output (Y) rises, the total number of transactions rises, and the MD curve shifts to the ———-
MD curve shifts to the right
when price level rises, most transactions costs more. thus MD curve shifts to the ——
movement along the MD curve
change in interest rate does what to the MD curve
- production
2. overall price level
MD 2 shifters
MD shift to left
recession Y and P both go down, MD?
MD shift to right
expansion Y and P both go up, MD?
MS goes up
interest rate goes down and production goes up..MS?
MS goes down
interest rate goes up and production goes down.. MS?
MS
what is a vertical line that shifts to the left/right as Fed wants to follow a certain policy
lowers interest rate
an increase in the MS (shifts to right) does what to interest rate
increases interest rate
a decrease in the MS (shifts to left) does what to interest rate
raises the equilibrium interest rate
an increase in aggregate output (Y) shifts the MD curve up, which does what to the equilibrium interest rate
raises the equilibrium interest rate
an increase in the price level ℗ shifts the MD curve up, which does what to the equilibrium interest rate
expansionary (easy) monetary policy
refers to the Fed policies that expand the MS in an effort to stimulate the economy
contractionary (tight) monetary policy
refers to the Fed policies that contract the MS in an effort to restrain the economy
a decrease in the interest rate
what causes QD of money to increase
ease monetary policy
a period of high unemployment, the Fed would most likely do what
expand the money supply
when economists refer to the “easy” monetary policy, they mean that the Fed is taking actions that will
