Notes After Exam 1 & 2 Flashcards
The fed deposits ____ the bank’s reserves and thereby ____ the amount of money in the economy
increase
increase
The Fed collects bonds from people and financial institutions and in return gives them ___ they can ___
checks
deposit in their banks
The Fed collects money from people and financial institutions and in return gives them ____, removing those funds from ____
bonds
circulation
Removing money from deposits to purchase bonds ____ the bank’s reserves and thereby ____ the amount of money in the economy
decreases
decreases
The market for borrowing and lending reserves between banks
Federal Funds Market
The interest rate that banks pay when borrowing reserves from other banks
Federal Funds Rate
____ price is the federal funds rate
Equilibrium
Decrease reserves =
selling bonds
Increase reserves =
buying bonds
Decreased FFR = (3)
- The fed buys bonds
- The quantity of reserves available in the banking system increases
- This in turn increases the money supply
Increased FFR = (3)
- he fed sells bonds
- The quantity of reserves available in the banking system decreases
- This in turn decreases the money supply
Federal funds rate affects
interest rate
Instability in the macroeconomy comes from real economic events
Real business cycle theory
Events of business cycle theory (2)
- Technological innovation
- Changes in resource availability
The rate, or price, at which one currency can be exchanged for another
Exchange rate
If the price of dollars for euros falls, we will see
a higher quantity of euros demanded
The demand curve for foreign currency is
downward sloping
If the price of dollars for euros increases, we will see
a higher quantity of euros supplied
The supply curve of foreign currency is
upward sloping
Exchange rate =
(B$/A$)
In flexible exchange rates, _____ determine exchange rates
exchange markets
Exchange rate changes as demand and supply for the currency change
Flexible exchange rate
(Exchange rate)
Increase in demand ->
Increase in supply ->
increase in price
decrease in price
price or exchange rate
Non-price determinants of exchange rates (4)
- Income
- Expectations
- Preferences
- Depends on situation
A decrease in the exchange rate makes foreign currency
cheaper
an increase in the exchange rate makes foreign currency
more expensive
An exchange rate that is set at a specific value and maintained over time
Fixed exchange rate
How to increase the money supply (2)
- Buying foreign reserves with your own currency
- Pursuing expansionary monetary policy
Appreciation benefits those who hold
foreign currency and want U.S. dollars
Depreciation benefits those who hold
U.S. dollars and want to buy foreign goods
Increase in exports ____ output
increases
More imports and fewer exports ___ output
decreases
