Interest Rates And Monetary Transmission Flashcards

1
Q

Define the role of the central bank

A

Acts as a banker to commercial banks and is responsible for setting interest rates and controlling inflation

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2
Q

What’s are the 3 ways the central bank control money supply

A

Reserve requirements: minimum ratio of cash reserves for banks

Discount rate: high interest rates discourage commercial banks from investing therefore keeping reserves high

Open market operations: buying and selling of financial securities

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3
Q

Define money market equilibrium

A

When money supply = money demand
(Money supply assumed constant as set by CB)
(Money demand downward sloping because high i/r results in low demand for money)

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