Flashcards in CH 14 Deck (18)
What are two items included in Wealth? What are characteristics of each?
Money-- No Interest, Means of Payment
Bonds-- Pays Interest, Not means of Payment
What are the three factors that affect holding wealth?
When there is a high Interest Rate people want to _____ Money? What does the nominal Interest rate tell us?
People want to SAVE money. Nominal Interest rate tell us the opportunity cost of holding money.
What is the Money Demand Curve?
Total quantity of money demanded at each (nominal) interest rate. --The total amount of Wealth people want to hold as money--
What moves ALONG the Money Demand Curve?
Change in the Interest Rate shift ALONG the curve..
-- Increase in IR moves us Leftward
-- Decrease in IR moves us Rightward
What shifts the entire Money Demand Curve? What does this mean?
A change in Price Level or Real Income shifts the entire money demand curve
-- At any rate, More money will be demanded--
What is the Money Supply Curve?
The total quantity of money supply, the amount of money that households want to loan.
--It is a vertical line.
--(Also the quantity of money that people are holding.)
What changes the Money Supply? Does Interest Rate make a difference?
The money supply stays constant until the FRS (AND FOMC) change it, Regardless of the interest rate.
What does Money Market Equilibrium=
Quantity of Money Supplied= Quantity of Money Demanded
What is the factor that moves the market towards Equilibrium?
The Interest Rate!
--At a higher IR, there is an excess of Money Supply causing the IR to Fall--
--At a lower IR, there is an excess of Money Demand causing the IR to Rise--
At equilibrium IR the quantity of money supplied and demanded is equal.
There is a _________ relationship between Bond Prices and Interest Rate. Why is this so?
An INVERSE relationship.
This happens because when the Money Market is not at equilibrium, there is excess demand/supply of Bonds as well.
(Excess $ Supply-- Excess Bond Demand)
(Excess $ Demand-- Excess Bond Supply)
How does the FRS and the FOMC Increase the interest rate?
An FOMC Sale-- Decreasing the Money Supply, decreasing Bond Prices and Increasing IR
How does the FRS and the FOMC decrease the interest rate?
An FOMC Purchase-- Increasing Money Supply, Increasing Bond Prices and Decreasing IR
What is Dynamic Monetary Policy? What is the opposite of Dynamic Monetary Policy?
Control/Manipulation of the Money supply to achieve an economic goal.
Defensive monetary Policy: Maintain an interest rate at a desirable level; Fight Inflation
How does the FRS and FOMC affect GDP?
By FOMC Purchases or Sale
How does the FRS and FOMC increase GDP? What is this called?
--Expansionary Monetary Policy--
Increase Money Supply (Money Multiplier)
Decrease Interest Rate
Increase A and Ip
Increase Real GDP (Expenditure Multiplier)
How does the FRS and FOMC decrease GDP?
What is this called?
--Contractionary Monetary Policy--
Decrease Money Supply (Money Multiplier)
Increase Interest Rate
Decrease A and Ip
Decrease Real GDP (Expenditure Multiplier)