Monetary Policy Part 2 Flashcards
Holding money to plan on making transaction
Asset demand
What does the demand for money curve show
The desire to hold M1 money at various interest rates
Holding money in bank account to make transactions
Transactions demand
In the demand for money curve, what does the quantity of money demanded change with
Interest rates
What does interest rate determine
Cost of holding cash
What does change in interest rate cause to change and not change
Change quantity of money demanded
Not change Demand for money
What is the relationship between quantity of money demanded and interest rates
Inverse relationship
What is the orientation of the supply of money
Supply of money is vertical at the amount in circulation
Who determines the money supply and how
The fed
Through the bond market
What is the supply of money in relation to the interest rate
Supply of money is independent of the interest rate
Where is the interest rate set
Where the demand and supply of money meet
What is more direct, fiscal policy or monetary policy
Fiscal policy
What does monetary policy rely on
Interest rates
What is the target of monetary policy
Investment
What does monetary policy rely heavily on
Borrowing and lending
What is the primary and secondary target of monetary policy
Primary target is investment
Secondary target is consumption
What are the steps that occur during expansionary or contractionary monetary policy
Fed either busy or sells bonds
Interest rate changes
Investment and consumption respond
Aggregate demand responds
What is velocity
Number of times per year an m1 dollar is spent
What is the relationship between M1 and velocity
Inverse relationship
What are the determinates of velocity
Efficiency of payment system
Interest rates
Frequency of payments
Explain how the efficiency of the payment system affects velocity
Credit cards and interest bearing checking accounts
How do credit cards affect velocity
They increase velocity because people do not need to carry as much M1 with a credit card
How to interest bearing checking accounts affect velocity
They decrease velocity bc they encourage people to have more M1
Money in their checking accounts
How do interest rates affect velocity
Increase in interest rates means an increase in velocity
Decrease in interest rates decrease velocity
What determines how much M1 you hold
Interest rates
How does the frequent of payments affect velocity
Increase in frequency means a higher velocity
Decrease in frequency means a lower velocity
What do monetarists believe
Money directly impacts GDP
What is key for the monetarist school of thought
Velocity is stable and predictable
According to a monetarist, what does a 3-5% increase in money supply result in
3-5% increase in real GDP
Is monetarism reactionary?
Monetarism is not reactionary, it provides stable, predictable economic conditions
What do monetarists think about changes in the money supply
Since changes in money supply are always predictable, aggregate demand, aggregate supply, and the long run aggregate supply move in harmony
What is the monetary equation of exchange
M • V = P • Q
What does the m stand for in the monetary equation of exchange
M1 in circulation
What does the V stand for in the monetary equation of exchange
Velocity
What does the P stand for in the monetary equation of exchange
Rate of inflation
What does the Q stand for in the monetary equation of exchange
Quantity of real GDP
What does P•Q together stand for in the monetary equation of exchange
Nominal GDP
Explain monetarism
Targets the money supply
Monetary rule: 3-5% increase in money supply yearly
Consistent policy gets consistent results
Explain Keynesian
Target interest rates to influence investment
React to economic conditions as needed
Diff circumstances need diff remedies
