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Flashcards in CH 14 Deck (18)
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1

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

2

What are the three factors that affect holding wealth?

--Price Level
--Real Income
--Interest Rate

3

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.

4

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--

5

What moves ALONG the Money Demand Curve?

Which direction?

Change in the Interest Rate shift ALONG the curve..
-- Increase in IR moves us Leftward
-- Decrease in IR moves us Rightward

6

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--

7

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.)

8

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.

9

What does Money Market Equilibrium=

Quantity of Money Supplied= Quantity of Money Demanded

10

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.

11

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)

12

How does the FRS and the FOMC Increase the interest rate?

An FOMC Sale-- Decreasing the Money Supply, decreasing Bond Prices and Increasing IR

13

How does the FRS and the FOMC decrease the interest rate?

An FOMC Purchase-- Increasing Money Supply, Increasing Bond Prices and Decreasing IR

14

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

15

How does the FRS and FOMC affect GDP?

By FOMC Purchases or Sale

16

How does the FRS and FOMC increase GDP? What is this called?

--Expansionary Monetary Policy--
FOMC Purchases!
Increase Money Supply (Money Multiplier)
Decrease Interest Rate
Increase A and Ip
Increase Real GDP (Expenditure Multiplier)

17

How does the FRS and FOMC decrease GDP?
What is this called?

--Contractionary Monetary Policy--
FOMC Sale!
Decrease Money Supply (Money Multiplier)
Increase Interest Rate
Decrease A and Ip
Decrease Real GDP (Expenditure Multiplier)

18

How do you calculate the Interest Rate on a Bond?

Interest Payment to you Over the Bond Period/
Amount you Paid for the Bond.