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AP Economics > Monetary Policy Part 2 > Flashcards

Monetary Policy Part 2 Flashcards

0
Q

Holding money to plan on making transaction

A

Asset demand

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1
Q

What does the demand for money curve show

A

The desire to hold M1 money at various interest rates

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2
Q

Holding money in bank account to make transactions

A

Transactions demand

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3
Q

In the demand for money curve, what does the quantity of money demanded change with

A

Interest rates

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4
Q

What does interest rate determine

A

Cost of holding cash

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5
Q

What does change in interest rate cause to change and not change

A

Change quantity of money demanded

Not change Demand for money

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6
Q

What is the relationship between quantity of money demanded and interest rates

A

Inverse relationship

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7
Q

What is the orientation of the supply of money

A

Supply of money is vertical at the amount in circulation

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8
Q

Who determines the money supply and how

A

The fed

Through the bond market

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9
Q

What is the supply of money in relation to the interest rate

A

Supply of money is independent of the interest rate

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10
Q

Where is the interest rate set

A

Where the demand and supply of money meet

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11
Q

What is more direct, fiscal policy or monetary policy

A

Fiscal policy

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12
Q

What does monetary policy rely on

A

Interest rates

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13
Q

What is the target of monetary policy

A

Investment

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14
Q

What does monetary policy rely heavily on

A

Borrowing and lending

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15
Q

What is the primary and secondary target of monetary policy

A

Primary target is investment

Secondary target is consumption

16
Q

What are the steps that occur during expansionary or contractionary monetary policy

A

Fed either busy or sells bonds
Interest rate changes
Investment and consumption respond
Aggregate demand responds

17
Q

What is velocity

A

Number of times per year an m1 dollar is spent

18
Q

What is the relationship between M1 and velocity

A

Inverse relationship

19
Q

What are the determinates of velocity

A

Efficiency of payment system

Interest rates

Frequency of payments

20
Q

Explain how the efficiency of the payment system affects velocity

A

Credit cards and interest bearing checking accounts

21
Q

How do credit cards affect velocity

A

They increase velocity because people do not need to carry as much M1 with a credit card

22
Q

How to interest bearing checking accounts affect velocity

A

They decrease velocity bc they encourage people to have more M1
Money in their checking accounts

23
Q

How do interest rates affect velocity

A

Increase in interest rates means an increase in velocity

Decrease in interest rates decrease velocity

24
Q

What determines how much M1 you hold

A

Interest rates

25
Q

How does the frequent of payments affect velocity

A

Increase in frequency means a higher velocity

Decrease in frequency means a lower velocity

26
Q

What do monetarists believe

A

Money directly impacts GDP

27
Q

What is key for the monetarist school of thought

A

Velocity is stable and predictable

28
Q

According to a monetarist, what does a 3-5% increase in money supply result in

A

3-5% increase in real GDP

29
Q

Is monetarism reactionary?

A

Monetarism is not reactionary, it provides stable, predictable economic conditions

30
Q

What do monetarists think about changes in the money supply

A

Since changes in money supply are always predictable, aggregate demand, aggregate supply, and the long run aggregate supply move in harmony

31
Q

What is the monetary equation of exchange

A

M • V = P • Q

32
Q

What does the m stand for in the monetary equation of exchange

A

M1 in circulation

33
Q

What does the V stand for in the monetary equation of exchange

A

Velocity

34
Q

What does the P stand for in the monetary equation of exchange

A

Rate of inflation

35
Q

What does the Q stand for in the monetary equation of exchange

A

Quantity of real GDP

36
Q

What does P•Q together stand for in the monetary equation of exchange

A

Nominal GDP

37
Q

Explain monetarism

A

Targets the money supply

Monetary rule: 3-5% increase in money supply yearly

Consistent policy gets consistent results

38
Q

Explain Keynesian

A

Target interest rates to influence investment

React to economic conditions as needed

Diff circumstances need diff remedies

AP Economics (8 decks)

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