Monetary Policy Flashcards
Reserve Ratio formula
Reserve Requirement * Bank Deposits
Tools of Monetary Policy:
- Discount Rate
- Open Market Operation
- Changing Reserve Requirements
Discount Rate
discount rate is the cost of borrowing money from the government.
when it is higher, the economy contracts
when it is lower, the economy expands
Reserve Requirements
A reserve requirement is set by the fed as the amount that the bank has to keep reserved
when it rises, the economy contracts
when it lowers, the economy expands
Open Market Operations
When the Fed buys and sells government securities to control the money supply
The Fed selling bonds contracts the economy
The Fed buying bonds expands the economy
Buying a Bond
When you buy a bond, you pay a principal amount of money for an investor to lend you a rate of interest
money demanded
money demanded depends on GDP, prices, and the cost of holding money
if the GDP increases, it goes left
if prices increase, it goes right
if interest rates increases, it goes left
money supplied
money supplied changes based on The Fed’s monetary policy and is perfectly inelastic
Marginal Propensity to Consume formula
consumption delta / income delta
Recessionary gap
the amount of income under potential GDP that expenditure is at
Inflationary Gap
the amount of income over potential GDP that expenditure is at
How do you calculate the velocity of money?
divide the GDP by the MONEY SUPPLY
