All Flashcards
What does a vertical money supply curve indicate?
The money supply is independent of the nominal interest rate.
On a money market graph, what determines the equilibrium nominal interest rate?
The intersection of the money demand and money supply curves.
What happens to the nominal interest rate when the money supply curve shifts right?
The nominal interest rate decreases.
What happens to the nominal interest rate when the money demand curve shifts right?
The nominal interest rate increases.
Illustrate the impact of the Fed buying bonds on the money market graph.
Rightward shift of the money supply curve, decreasing the nominal interest rate.
Illustrate the impact of increased price level on the money market graph.
Rightward shift of the money demand curve, increasing the nominal interest rate.
What happens to the money supply curve if the Fed increases the reserve requirement?
The money supply curve shifts to the left.
What happens to the money supply curve if the Fed sells bonds?
The money supply curve shifts to the left.
Illustrate the impact of decreased transaction costs on the money market graph.
Leftward shift of the money demand curve, decreasing the nominal interest rate.
What does the intersection of money demand and money supply represent?
The equilibrium nominal interest rate and quantity of money.
How is the money market affected by an increase in real GDP?
Money demand curve shifts right, increasing the nominal interest rate.
Define nominal interest rate.
Real interest rate + expected inflation rate.
Define the demand for money.
The quantity of money people want to hold at various interest rates.
Define the money supply.
The total amount of money in circulation in an economy.
Define reserve requirement.
The fraction of deposits banks must hold in reserve.
Define discount rate.
The interest rate at which commercial banks can borrow money directly from the Fed.
Define open market operations.
The Fed buying and selling government bonds to influence the money supply.
Define federal funds rate.
The target rate the Fed wants banks to lend to each other overnight.
Define money market equilibrium.
The point where money demand equals money supply, determining the nominal interest rate.
Define investment demand.
The amount of investment spending firms want to make.
Define easy monetary policy.
Increasing the money supply to lower interest rates and stimulate the economy.
Define tight monetary policy.
Decreasing the money supply to raise interest rates and slow down the economy.
What is the impact of lowering the reserve requirement on the money supply?
Increases the money supply.
What is the impact of raising the discount rate on the money supply?
Decreases the money supply.
What is the impact of the Fed buying bonds on the nominal interest rate?
Decreases the nominal interest rate.
What is the impact of the Fed selling bonds on the nominal interest rate?
Increases the nominal interest rate.
How does easy monetary policy affect aggregate demand?
Increases aggregate demand by lowering interest rates and increasing investment.
How does tight monetary policy affect aggregate demand?
Decreases aggregate demand by raising interest rates and decreasing investment.
What is the effect of increasing the money supply on investment demand?
Increases investment demand due to lower interest rates.
What is the effect of decreasing the money supply on investment demand?
Decreases investment demand due to higher interest rates.
What is the Fed's primary tool for conducting monetary policy?
Open market operations.
How does the Fed influence the federal funds rate?
Through open market operations.
What is the goal of expansionary monetary policy during a recession?
To lower interest rates, stimulate investment, and increase aggregate demand.