Competency 4

What policy can the Fed follow to increase money supply?

Reduce the interest rate on reserves

Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would happen in the market for that good?

Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.

If the demand for a product increases, then we would expect equilibrium price

and equilibrium quantity both to increase

Equilibrium quantity must decrease when demand

decreases and supply does not change, when demand does not change and supply decreases, and when both demand and supply decrease.

If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

the availability of close substitutes in determining the price elasticity of demand

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good.

What increases the money supply?

A decrease in the discount rate and a decrease in the interest rate on reserves

What are examples of monetary policy?

1. The Federal Reserve reduces the reserve requirement 2. The Federal Open Market Committee decides to buy bonds 3. The Federal Open Market Committee decides to sell bonds

What is a determinant of the price elasticity of demand for a good?

1. the time horizon 2. the definition of the market for the good 3. the availability of substitutes for the good

When the Fed decreases the discount rate, banks will

borrow more from the Fed and lend more to the public. The money supply will increase

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

If the cross-price elasticity of two goods is negative, then the two goods are

complements

Equilibrium price must decrease when

decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be

Other things the same, if reserve requirements are increased, the reserve ratio

increases, the money multiplier decreases, and the money supply decreases

The discount rate is

the interest rate the Fed charges banks

The price elasticity of supply measures how much

the quantity supplied responds to changes in the price of the good.

A key determinant of the price elasticity of supply is the

time horizon

If the supply of a product increases, then we would expect equilibrium price

to decrease and equilibrium quantity to increase