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55 Cards in this Set

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d: monetary policy
the various tools the fed uses to influence the macroeconomy
how does the fed control the money supply
by using tools that control the interest rate
d: demand for money
how much money people would like to hold given the constraints that they face
d: wealth constraint
at any given point in time wealth is fixed, stock variable, means that you must give up one kind of wealth in order to acquire another
if we want to hold wealth in the form of money we must hold less wealth in other forms: savings accounts, money market funds, time deposits, stocks, bonds, etc
is wealth a fixed or stock variable
stock
at one point in time
whats a household's quantity demanded for money
household’s quantity of money demanded is the amount of wealth that the household chooses to hold as money rather than other assets
d: capital gain
rise in value of a stock
whats the opp cost of holding money
the interest you could have earned by holding other assets instead
households can divide wealth between two assets:
1) money which can be used as a means of payment but earns no interest
2) bonds which earn interest but cannot be used as a means of payment
Determinants of Whether We Hold Wealth as Money or Bonds
1) price level
2) real income
3) interest rates
demand for money increases when
1) price level rises
2) real income/purchasing power/ real gdp rises
3) interest rates fall
demand for money decreases when
1) price level decreases
2) real income/purchasing power/real gdp decreases
3) interest rates rise
demand for money by businesses
same as households
when theres a change in interest rate, the demand curve will
not shift, theres a movement along
who controls the supply of money
the Fed
characteristics of supply line
vertical
fixed amount
how is the money supply increased
purchase of bonds
(amount purchased X money multiplier= effect)
d: loanable funds market
where a flow of loanable funds is offered by lenders to borrowers (long run)
in the short run, equilibrium is found in the
money market graph
d: money market
the interest rate at which the Q of money demanded and the Q of money supplied are equal (Y= interest rate, X= $)
axises on the money market graph
y is interest rate

x is money
what does the money supply line tell us
e. The Ms line tells us the amount of money that actually exists in the economy, tells us the amount of money that people are actually holding at any given moment
at equilibrium the amount of money being held is
being willingly held
d: excess demand for bonds
the amount of bonds demanded exceeds the amount supplied at a particular interest rate, there’s an excess supply of money, the price of bonds will rise, decrease in the interest rate
d: Excess supply of money
the amount of money supplied exceeds the amount demanded at a particular interest rate, the price of bonds will rise, decrease in the interest rate
when there is an excess demands for bonds
theres an excess supply of money
price of bonds will rise
decrease in the interest rate
when there is an excess supply of money
theres an excess demand for bonds
price of bonds will rise
decrease in the interest rate
when theres an excess demand for money
excess supply of bonds
price of bonds decrease
interest rates increase
when theres an excess supply of bonds
excess demand for money
price of bonds decrease
interest rates increase
d: Bond
promise to pay back borrowed funds at a certain date or dates in the future
d: interest payment
the amount you earn from the purchase price of the bond minus the amount you actually paid
d: interest rate
(purchase price-amount paid)/amount paid
the higher the price of the bond....
the lower the interest rate
d: secondary bond market
where bonds issued in previous periods are bought and sold, if there is an increase in the interest rates of this market, the interest rates increase in the primary market because the bonds are substitutes
d: primary bond market
bonds newly issued are bought
if theres an increase in IR the secondary bond market, the IR in the primary bond market will
increase since the bonds are susbtitutes
To Lower the Interest Rate
Purchase Bonds
Money Supply Shifts to the Right
Excess supply of money and excess demand for bonds
Price of Bonds Increases
Interest Rate Decreases
To Increase the Interest Rate
Sell Bonds
Money Supply Shifts to the Left
Excess demand for money and excess supply of bonds
Price of bonds Decreases
Interest Rate Increases
A drop in the interest rate will boost several different types of spending
Stimulates business spending on plant an equipment
Buying on new houses and apartments increases, since people borrow money to buy these things
Spending on big ticket items (consumer durables) increases
d: consumer durables
big ticket items such as new cars, furniture and dishwashers, last several years
lower interest rate causes
higher consumption, and causes a shift of the consumption function, rise in autonomous consumption spending
how does monetary policy work
Bonds are bought
Money supply increases
Interest rate decreases
Autonomous consumption and planned investment increases
Real gdp increases
AE line shifts out
whats the point of the Fed targeting interest rates
To prevent fluctuations in money demand from affecting the economy the Fed adjusts the money supply to maintain its interest rate target
how does the Fed change its interest rate target
to prevent or address unwanted changes in AE, the fed changes its interest rate target adjusting the money supply as needed to reach it
why does the Fed generally only need to change the Fed funds rate
interest rates tend to rise and fall together, so targeting any one influences all of them
d: federal funds market
the interest rate paid on loans in a market that it can very easily monitor and control, banks with excess reserves lend them out to other banks for very short periods
d: federal funds rate
the interest rate in the federal funds market
d: conventional monetary policy
when the Fed guides the economy by controlling the fed funds rate
conditions that Make the Fed’s Conventional Monetary Policy Less Effective
Changing interest rate spreads
The zero lower bound
Financial crises
d: interest rate spread
the difference between an interest rate and some other benchmark interest rate
during normal times, risks are perceived as stable so the spread is somewhat constant, so the Fed can change ...
the Fed funds rate and see a change on the interest rates of long term loans
times of perceived different risks can affect
the spread between the Fed funds rate and long term loans
unconventional Policy to Alter Spreads
could purchase any type of asset to alter the rate of return and affect interest rates
d: zero lower bound
the lowest possible value (0) for any nominal interest rate (such as the Fed funds rate)
unconventional Policy at the Zero Lower Bound
intervene and alter other interest rates
lower the real rate on interest through inflation