Quiz #8 Review Flashcards
Federal Funds Rate
the interest rate banks charge each other for overnight loans
expansionary monetary policy
the Federal Reserve’s decreasing interest rates to increase real GDP
contractionary monetary policy
the Federal Reserve’s increasing interest rates to reduce inflation
The Taylor Rule
a rule developed by John Taylor that links the Fed’s target for the federal funds rate to economic variables
Taylor Rule formula
Federal Funds target rate = current inflation rate + real equilibrium federal funds rate + ((1/2) x inflation gap) + ((1/2) x output gap)
inflation targeting
conducting monetary poilcy so as to commit the central back to achieving a publicly announced level of inflation
The Four Goals of Monetary Policy
- price stability
- high employment
- stability of financial markets and institutions
- economic growth
demand for money
the demand to hold money as money instead of holding it in some other form of wealth like a government bond
demand for money is inversely related to _________
interest rates
The Money Market X and Y axis’
- X axis is the quantity of money
- Y axis is the interest rate
Demand for money curve slopes _______ and the supply of money curve slopes ________
down, trick question: its perfectly vertical
2 things that shift the demand for money curve
- a change in real GDP
2. a change in the price level
if real GDP goes up, demand for money goes __________
up!
if real GDP goes down, demand for money goes __________
down
if the price level goes up, demand for money _______
rises
if the price level lowers, the demand for money ________
decreases
equilibrium interest rate
intersection for supply of money and demand for money curve
If the money supply is increased, interest rates __________
if the money supply is decreased, interest rate ________
falls, rises
the market for loanable funds is concerned with __________ interest rates
the money market is concerned with ______ interest rates
long-term interest rates
short-term interest rates (fed funds rate)
what are long-term interest rates used for in the market for loanable funds?
investors buying corporate bonds, business undertaking investment, consumer buying a house
what are the short-term interest rates used for in the money market?
things like the fed funds rate!
How do interest rates affect aggregate demand? (HINT: 3 ways)
- consumption
- investment
- net exports
interest rates - aggregate demand - consumption
when rates are lower, people are more likely to buy houses, cars, furniture
-when rates are low, people are likely to save less and spend more
interest rates - aggregate demand - investment
when rates are lower, firms will borrow more to undertake new projects
-when borrowing costs are lower, break even point for new projects is more easily attained
interest rates - aggregate demand - net exports
when interest rates go down in the US, AD increases
why goes a decrease in interest rates result in an increase in AD?
if interest rates go down, foreign investors buy bonds, this increase demand for US dollar in the international market, this makes the dollar stronger, this makes Americans buy more imports to save money, their domestic production goes down, AD decreases!
example of Taylor Rule:
Current inflation is 3%, current real rate of interest is 1%, inflation is 2% higher than we want it to be, GDP is 6% lower than we want it to be
Fed Funds rate = 3 + 1 + (.5)(2) + (.5)(-6) = 2
