What is monetary policy?
a central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth
What is interest?
the payment made for the use of money
What is transactions demand for money?
the amount of money people want to hold for use as a medium of exchange (to make payments)
What is the asset demand for money?
the amount of money people want to hold as a store of value
How do you figure the total demand for money?
combine the asset demand for money and the transactions demand for money
What can shift the total demand for money (Dm)?
anything that affects the demand for money other than interest, but mainly, nominal GDP
What are open-market operations?
the buying and selling of U.S. government securities by the Federal Reserve Banks for purposes of carrying out monetary policy
How is equilibrium interest rate found?
found at the intersection of money supply and money demand curves
How are interest rates and bond prices related?
inversely
The Fed Banks write balance sheets consisting of assets and liabilities. What are the assets included? What are the liabilities included?
Assets: securities and loans made to commercial banks
Liabilities: reserves of commercial banks, treasury deposits, and currency in circulation
What is the discount rate?
interest rate charged on loans to commercial banks
What are term auctions?
commercial banks anonymously bid to obtain loans being made available by the Fed as a way to expand reserves in the banking system
What is expansionary monetary policy?
Federal Reserve System actions to increase the money supply, lower interest rates, and expand real GDP (easy money policy)
What are the two things done by expanding federal reserves?
1. increases supply of fed funds, lowering fed fun rate to new targeted rate
2. lowered suppy of money places downward pressure on other interest rates
What is the prime interest rate?
a benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals
What is restrictive monetary policy?
Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation (a tight money policy)
What is cyclical asymmetry?
the idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy form severe recession
What are the steps in the expansionary monetary policy?
recession --> send excess reserves to banks --> interest rate falls --> investment spending will increase --> AD (aggregate demand) increases --> increase in GDP
The basic determinant of the transactions demand for money is the _____?
level of nominal GDP
The basic determinant of the asset demand for money is the ___?
interest rate
If there is an increase in the total demand for money, equilibrium rate will rise. Why?
Because the money supply is changed by the FED and is not affected by the demand for money
Monetary policy is easier to conduct than fiscal policy because?
monetary policy has a much shorter administrative lag than fiscal policy
If there is an increase in the nations money supply, the interest rate will...?
fall, investment spending will rise, aggregate demand will shift right, and real GDP and the price level will rise