Monetary Policy Part 2 Flashcards Preview

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Flashcards in Monetary Policy Part 2 Deck (39):
0

What does the demand for money curve show

The desire to hold M1 money at various interest rates

1

Holding money to plan on making transaction

Asset demand

2

Holding money in bank account to make transactions

Transactions demand

3

In the demand for money curve, what does the quantity of money demanded change with

Interest rates

4

What does interest rate determine

Cost of holding cash

5

What does change in interest rate cause to change and not change

Change quantity of money demanded

Not change Demand for money

6

What is the relationship between quantity of money demanded and interest rates

Inverse relationship

7

What is the orientation of the supply of money

Supply of money is vertical at the amount in circulation

8

Who determines the money supply and how

The fed

Through the bond market

9

What is the supply of money in relation to the interest rate

Supply of money is independent of the interest rate

10

Where is the interest rate set

Where the demand and supply of money meet

11

What is more direct, fiscal policy or monetary policy

Fiscal policy

12

What does monetary policy rely on

Interest rates

13

What is the target of monetary policy

Investment

14

What does monetary policy rely heavily on

Borrowing and lending

15

What is the primary and secondary target of monetary policy

Primary target is investment

Secondary target is consumption

16

What are the steps that occur during expansionary or contractionary monetary policy

Fed either busy or sells bonds
Interest rate changes
Investment and consumption respond
Aggregate demand responds

17

What is velocity

Number of times per year an m1 dollar is spent

18

What is the relationship between M1 and velocity

Inverse relationship

19

What are the determinates of velocity

Efficiency of payment system

Interest rates

Frequency of payments

20

Explain how the efficiency of the payment system affects velocity

Credit cards and interest bearing checking accounts

21

How do credit cards affect velocity

They increase velocity because people do not need to carry as much M1 with a credit card

22

How to interest bearing checking accounts affect velocity

They decrease velocity bc they encourage people to have more M1
Money in their checking accounts

23

How do interest rates affect velocity

Increase in interest rates means an increase in velocity

Decrease in interest rates decrease velocity

24

What determines how much M1 you hold

Interest rates

25

How does the frequent of payments affect velocity

Increase in frequency means a higher velocity

Decrease in frequency means a lower velocity

26

What do monetarists believe

Money directly impacts GDP

27

What is key for the monetarist school of thought

Velocity is stable and predictable

28

According to a monetarist, what does a 3-5% increase in money supply result in

3-5% increase in real GDP

29

Is monetarism reactionary?

Monetarism is not reactionary, it provides stable, predictable economic conditions

30

What do monetarists think about changes in the money supply

Since changes in money supply are always predictable, aggregate demand, aggregate supply, and the long run aggregate supply move in harmony

31

What is the monetary equation of exchange

M • V = P • Q

32

What does the m stand for in the monetary equation of exchange

M1 in circulation

33

What does the V stand for in the monetary equation of exchange

Velocity

34

What does the P stand for in the monetary equation of exchange

Rate of inflation

35

What does the Q stand for in the monetary equation of exchange

Quantity of real GDP

36

What does P•Q together stand for in the monetary equation of exchange

Nominal GDP

37

Explain monetarism

Targets the money supply

Monetary rule: 3-5% increase in money supply yearly

Consistent policy gets consistent results

38

Explain Keynesian

Target interest rates to influence investment

React to economic conditions as needed

Diff circumstances need diff remedies