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ECON 203 > Topic 14- Monetary Policy > Flashcards

Topic 14- Monetary Policy Flashcards

1
Q

Monetary Policy

A

actions the central bank takes to manage the money supply and interest rates to aciheve macroeconomic goals

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2
Q

what are the goals of central bank

A

1) price stability (during inflation/deflation)
2) high employment
3) stability of financial markets and institutions (lender of last reesort)

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3
Q

what is high employment

A

low unemployment

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4
Q

what does high unemployment indicate

A

economy is below the natural elvel of outpu

resources arent being used effectively (even human resources)

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5
Q

recall the monetary policy tools

A

open market operations
lending to financial institutions
changing reserve ratio

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6
Q

can central bank affect inflation rate directly?

A

no! they ise monetary policy tools to afhust the money supply and the interst rate

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7
Q

assumptions about the money market

A

1) two financial assets only:
-money: liquid and used for transaction but pays no interest
-bonds: illiquid and not used for transaction but pay positive interest rate (i)

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8
Q

How do you determine the amount of money you should hold vs the amount of bonds you hold

A

1) the level of transactions
2) the interest rate on bonds

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9
Q

What is level of transactions

A

How often consumers spend money basically

higher income implies more transactions and hence higher demand for money

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10
Q

why would you rather hold bonds than money

A

if interst rate is higher then you would rather hold bonds!

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11
Q

HIGHER INTEREST RATE IN MONEY MARKET, SHOULD YOU KEEP BONDS OR MONEY

A

means there is a higher oppprotuntiy cost for not having bonds/keeping money

so YOU HOLD LESS MONEY AND MOREEEE BONDS

thats why money demand curve is downward sloping@

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12
Q

what is the demand curve in the money market

A

the QUANTITY OF MONEY money people hold

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13
Q

what causes money demand curve to shift

A

-> this depends on total income in the economy (gdp)

so:
a) the price level (INFLATION)
b) the real gdp (which is equal to total incomes)

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14
Q

what causes a movement ALOOOONG the demand curve

A

CHANGES IN INTEEREST RATE <3

THIS IS MEASURED IN THE Y AXIS

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15
Q

what is the money supply cruve look like

A

a vertical line, because it depends solely on the central bank (not on interest rate)

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16
Q

theory of liquidity preferecne

A

the interest rate adjusts to balance the supply and demand for money

Basically that the interest rate is what helps find equilibrium in the money supply (vertical line) and money demand (downward sloping like) curves in money market

17
Q

how does money supply increase

A

through OPEN MARKET OPERATIONS!!

when central bank BUYS government bonds: increases money supply
when central bank SELLS government bonds: decreases money supply

18
Q

what does open market operations impact in money market

A

affect money supply, which will OBVIOSULy influecne interest rate

Move money supply (vertical curve) to the right, decreases interest rate (because the Demand curve is held ocnstant)

19
Q

what would happen if central bank only adjusted the overnight interest rate instead of open market operations

A

temporary fix, money supply would go back to eequilibrium, affects long term int rates but mostly short term
(movement along the x🤣curve)

changing money supply will SHIFT THE CURVE

20
Q

what is more effective in moving interest rate, change in money supply or change in overnight interest rate

A

overnight interest rates: affects both long term and short term interest rates, but more emphasis on short

Money supply: has longer lasting impacts

21
Q

Why would bank of canada want to decline output

A

Because they want to focus on price stability, during peirods of high output and production, there is also HIGH INFLATIOON!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

22
Q

when central bank BUYS government bonds:

A

INCREASES MONEY SUPPLY

23
Q

when central bank SELLS government bonds:

A

decreases money supply

24
Q

when central bank DECREASES MONEY SUPPLY WHAT HAPPENS

A

iterest rates rise

25
Q

when central bank INCREASES MONEY SUPPLY

A

interest rates decreaiases

26
Q

How does high interest rate affect AD:

A

AD CURVE SHIFT LEFT

Consumption: DECREASE THE amount people want to spend, higher cost of durable goods

G: N/A

I: Decreases Investments, more expensive to borrow for firms

NX: Decreases exports because people dont want to buy from somewhere with high interest rates, MORE IMPORTS

27
Q

How does LOW interest rate affect AD:

A

AD CURVE SHIFT RIGHT

Consumption: increases the amounts of goods people buy, increase durabel good spending,

G: N/A

I: Increases Investments, LESS expennsive to brrow from banks, when int rates on mortgage loans fall, more investment

NX: Increases exports because people WANNA BUY WHERE INTEREST RATE IS LOW!! MORE EXPORTS

28
Q

When interest rates decrease, a intnderest rates on mortgage loans fall, more new homes will be
purchased by households

what will this do

A

=⇒ investment increases

AD CURVE RIGHT

29
Q

what happens during a recession

A

short run equilibrium (intersection of AD curves and SRAS curve) happens below natural level of production

UNEMPLOYMENT IS SO HIGH

30
Q

How does BoC decrease unemployment?

A

exansipirary fiscal policy, INCREASE MONEY SUPPLY BY BUYING BONDS, lower the interest rate, lower int rates shift AD CURVE RIGHT

REAL GDP AND PRICE LEVEL RISE

31
Q

How does BoC cool an overactive economy

A

contractionary fisal policy, decrease money supply by selling bonds, money supply decreaes, interest rate rises, AD CURVE shift left

REAL GDP AND PRICE LEVEL FALL

32
Q

When economy in expansion, what does BoC employ

A

contractionary policy

33
Q

when ecnomy in recession what does BoC emply

A

exapsnionary ppolicy

34
Q

why would BoC ever use contractionary poicy? Make output decline?

A

in the long run it is unsutaibale, because it would result in rising inflation

THIS IS PRICE INSTABITLIY

35
Q

wHAT is the long run impact of contractionary monetary policy

A

gdp and price level fall

36
Q

wHAT is the long run impact of expansioarnyr monetary policy

A

real gdp and price level rise

37
Q

BASIACLLY, IF THE MS VERTICAL CURVE SHIFT RIGHT

A

THE INTEREST RATES WILL FALL ON THE MS DEMAND CURVE, AD CURVE SHIFT RIGHT, EXPANSIONARY POLCIY, HIGHER LEVEL OF GDP AND PRICE LEVEL

38
Q

BASICALLY, IF THE MS VETICAL CURVE SHIFT LEFT

A

THE INTEREST RATES WILL RISE ON THE MS DEMAND CURVE, AD CURVE SHIFT LEFT, CONTRACTIONARY MONETARY POLICY, LOWER LEVEEL OF GDP ADN PRICES LEVEL

ECON 203 (16 decks)

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