week 22

Question 1

what is fed watch

Answer 1

analysts attempt to forecast fed decisions about monetary policy, have significant effects on financial markets and macro economy

Question 2

why is monetary policy a stabilisation tool

Answer 2

quickly decided and implemented
more flexible and responsive than fiscal policy

Question 3

what is the FOMC

Answer 3

federal open market commitee

Question 4

what does the FOMC do

Answer 4

money supply and demand to determine interest rate
manipulates supply to achieve desired interest rate

Question 5

what are portofolio allocation decisions

Answer 5

allocate a persons wealth among alternative forms
owning a variety of assets helps manage risk

Question 6

what is the demand for money

Answer 6

the amount of wealth held in the form of money
sometimes called the liquidity preference

Question 7

what affects the demand for money

Answer 7

people balance the cost and benefit of holding money
quantity of money demanded increases with income
technology like ATM and online banking reduce the demand for money

Question 8

what is the marginal cost of holding money

Answer 8

the interest is forgone
most forms of money pay little/no interest
compared to alternative assets like stocks/bonds that produce interest
if nominal interest is higher money is less demanded

Question 9

what does the demand for money depend on

Answer 9

nominal interest rate - the higher the interest rate, the lower the quantity of money demanded
real income/output - higher income, greater quantity of money demanded
price level - the higher the price level the greater the quantity of money demanded

Question 10

what is the money demand curve

Answer 10

shows the relationship between the aggregate quantity of money demanded and the nominal interest rate
an increase in the nominal interest rate increases the opportunity cost of holding money

Question 11

what causes the money demand curve to shift

Answer 11

changes in factor other than nominal interest rate causes shift
change in demand can be caused by increase in output, higher prices, better tech, better finance, foreign demand for dollars

Question 12

how is supply of money controlled

Answer 12

controlled by open market operations by FED
purchase of bonds increases money supply
sale of bonds decreases money supply
supply of money is vertical

Question 13

how does the FED decrease money supply

Answer 13

FED sells bonds to public
supply of bonds increases
price of bonds decrease
interest rate increase

Question 14

how does the FED increase money supply

Answer 14

FED buys bonds from the public
demand for bonds increases
price of bonds increase
interest rate decreases

Question 15

why is FED policy announced in terms of interest rate

Answer 15

public is not familiar with the size of money supply
main effects of monetary policy on the economy work through interest rates
interest rates are easier to supply and monitor than money supply

Question 16

what is the federal funds rate

Answer 16

rate commercial banks charge each other on short term loans
banks borrow from each other if they have insufficient funds
market determined rate
targeted by FED

Question 17

how does the FED decrease federal funds rate

Answer 17

conducts open market purchases
reserves increase, interest rates tend to move together

Question 18

what is discount window lending

Answer 18

if a bank needs reserves, they can borrow from FED at a discount rate
must meet certain eligibility criteria

Question 19

how do you calculate money supply

Answer 19

public currency + (bank reserves / reserve-deposit ratio)

Question 20

what is the reserve requirement

Answer 20

minimum value of the ratio of bank deposits that must be held in reserves, rarely changed

Question 21

what is the zero lower bound

Answer 21

a level close to zero below which the central bank cannot reduce short-term interest rates

Question 22

what is quantative easing

Answer 22

the FED buys financial assets, lowering the yield or return of those assets while injecting liquidity

Question 23

what is forward guidance

Answer 23

FED gives indications of its future policies so markets will react

Question 24

what is interest on reserves

Answer 24

even at an interest rate of 0, the FED can offer interest on its reserves to give banks a reason to keep money at the FED

Question 25

what is a policy reduction function

Answer 25

describes how the action a policymaker takes depends on the state of the economy

Question 26

what is the taylor rule

Answer 26

r = 0.01 + 0.5 ((Y-Y)/Y) + 0.5π