Econ Chapter 16 – Flashcards

The price paid for the use of money

The demand for money as a medium of exchange, dependent on the level of nominal GDP (if nominal GDP increases, people want more money to buy things with)

The extent to which people want to hold money as an asset, varies inversely with the interest rate

Found by adding the asset demand to the transactions demand

Found by combining the supply for money with the demand for money (changes in supply are most important)

1. Securities 2. Loans

Consist largely of treasury bills, treasury notes, and treasury bonds, meant to help commercial banks create money by lending

Consist of commercial banks borrowing from the Federal Reserve Banks

1. Reserves of Commercial Banks 2. Treasury Deposits 3. Federal Reserve Notes Outstanding

1. Open market operations 2. The reserve ratio 3. The discount rate 4. Interest on reserves

Consist of buying government bonds from or selling government bonds to commercial banks and the general public

1. bank gives holdings of securities to the Fed 2. Fed increases reserves in the account of commercial bank at the Fed

1. public gives securities to Fed in return for a check drawn by Fed 2. public deposits check in bank of choice 3. bank sends check to Fed and gets an increase in their reserves This helps increase lending by commercial banks and increases supply of money

Is something the Fed can do, and it changes the amount of excess reserves and changes the size of the monetary multiplier

The interest rate charged by the Fed for commercial banks that borrow from it

The interest the Fed can pay out on reserves (to reduce amount of bank lending/money supply, Fed can increase interest rate to make banks want to keep money in the Fed)

The rate of interest that banks charge each other on overnight loans made from temporary excess reserves (determined by the Federal Open Market Committee (FOMC)) (increases when Fed sells bonds to banks)

"Easy Money Policy", used when faced with recession, this policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output (lowers federal funds rate, expansion of nation's money supply

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals, usually higher than the federal funds rate

"Tight Money Policy", used for periods of rising inflation, this policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold-down price level increases (raises federal fund rate, contraction of nation's money supply)

Assumes the Fed has a 2% "target rate of inflation" that it is willing to tolerate and the FOMC follows three rules: *1.* When Real GDP = potential GDP, and inflation rate is at 2%, federal funds target rate should be 4%, implying real federal funds rate of 2% (4% target - 2% inflation rate) *2.* For each 1% increase of real GDP over potential, real federal funds rate should be raised .5% *3.* For each 1% increase in inflation rate over 2%, real federal funds rate should be raised by .5%

When the demand curve for money and the supply curve for money are brought together

Flexibility and isolation from political pressure

Investment component of total spending

1. buy government securities 2. lower the legal reserve ratio 3. lower the discount rate 4. reduce the interest rate it pays on reserves This will increase excess reserves and reduce federal funds rate

1. sell government securities 2. increase the legal reserve ratio 3. increase discount rate 4. increase interest rate it pays on reserves This will reduce excess reserves and increase federal funds rate

Fed aimed to keep short term interest rates near 0 to stimulate the economy

A central bank is constrained in its ability to stimulate the economy through lower interest rates because they cant be lower than 0

The governments plan to buy 677 billion dollars worth of long term government bonds while simultaneously selling the same amount in short-term bonds

The Fed's response to the zero lower bound problem, the same as open market operations yet does not intend to lower interest rates

Pre-announcing how much they were going to buy and how long it would last

a downsloping line or curve from left to right.

The money supply

asset demand for money.

surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

more effective in controlling demand-pull inflation than in moving the economy out of a recession.

the opportunity cost of holding money increases as the interest rate rises.

increases the interest rate and decreases aggregate demand.

$200 billion

quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

decrease the prime interest rate.

the Fed pursued quantitative easing.

the interest rate will rise.

The Fed sold bonds to banks.