26.2 Q&A – Flashcards
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Which of the following is a monetary policy target used by the Fed?
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Interest rate
(The other is money supply)
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The Fed uses policy targets of interest rates and/or money supply because..
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it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level
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What do economists mean by the demand for money?
What is the advantage of holding money?
What is the disadvantage of holding money?
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It is the amount of money - currency and checking account deposits - that individuals hold
Money can be used to buy goods, services, or financial assets
Money, in the form of currency or checking account deposits, earns either no interests or a very low rate of interests
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Suppose the Fed wants to lower the equilibrium interest rate....
Use the drawing tool, draw a new money demand or supply curve ...
Use the point tool, identify the new equilibrium
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Shift money supply to the right
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The federal funds rate is
Additionally, the federal funds rate is
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the interest rate that banks charge each other for overnight loans
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate trough open market operations
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In the graph of the money market shown on the right, what could cause the money supply to shift from MS-1 to MS-2 (left shift)
In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD-1 to MD-2 (right shift)
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The Fed decreases the money supply by deciding to sell US treasury securities
Both (A) and (B)
(A) - GDP increase
(B) - Increase in price level
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What is the name of the "target interest rate" mentioned in the article?
Who borrows money and who lends money at this "target interest rate"?
What is the discount rate
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The federal funds rate
Banks borrow and Banks lend
The discount rate is the rate at which the Fed leds to banks
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If the Fed purchases $140m worth of US Treasury bills from the public, the money supply will
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increase
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What is the relationship between the federal funds rate falling and the money supply increasing
How does lowering the target for the federal funds rate "pour money" into the banking system?
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To decrease the federal funds rate, the Fed must increase the money supply
To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves
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If the Fed would no longer have a specific target for the money supply, it would be targeting the
The fed gave up targeting the money supply because
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federal funds rate
the relationship between monetary aggregates and other economic variables was becoming unreliable.
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In the figure to the right, which of the following events is most likely to cause a shift in the monetary demand (MD) curve from MD-1 to MD-2 (right Shift)
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Increase in real GDP or
Increase in price level
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Which of the these variables are the main monetary policy targets of the Fed?
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Money supply and interest rate
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When the interest rates on treasury bills and other financial assets are low, the opportunity cost of holding money is... {x}
so the quantity of money demanded will be ...{y}
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{x} low
{y} high
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If real GDP increases...
If the price decreases...
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the money demand curve shifts to the right
the money demand curve shifts to the left
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If the FOMC decides to increase the money supply, it orders the trading desk to...
If the FOMC orders the trading desk to sell treasury securities...
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buy US treasury securities
the money supply curve will shift to the left and the equilibrium interest rate will rise
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Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will [x] Tresury bills, thereby [y] their prices, and [z] their interest rates
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sell / decreasing / increasing
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When the Fed conducts monetary policy, the most relevant interest rate is the
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short-term nominal interest rate
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To affect economic variables such as real GDP or the price level, the monetary policy target the FED has generally focused on is the
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federal funds rate
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The interest rate that banks charge each other for overnight loans is called the
Which of the following statements is correct?
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federal funds rate
All of the above
