ECON CH.14

nominal interest rates _________ the quantity of money supplied to the economy.

are determined by

money is demanded by:

individuals and businesses

because ___________ responds slowly to changes in policy or economic conditions, the Fed can influence the real interest rate by changing the nominal interest rate.

inflation

the federal funds rate is closely watched by the public, politicians, the media and the financial markets because it is a strong indicator of the Fed's plans for _________

monetary policy

The principal benefit of holding ________ is its usefulness in carrying out transactions such as buying gas or paying for a movie ticket.

money

in the market for money, the equilibrium ________ equates the quantity of money supplied with the quantity of money demanded

nominal interest rate

in the market for money, the equilibrium _________ equates the quantity of money supplied with the quantity of money demanded.

nominal interest rate

the money demand curve relates the aggregate quantity of money demanded to the ___________.

nominal interest rate

the ___________ of holding money is measured by the interest rate that could have been earned by instead holding interest-bearing assets such as stocks and bonds.

opportunity cost

the decision about the forms in which to hold one's wealth is called the _________ allocation decision.

portfolio

when the Fed buys long-term financial assets, thereby lowering their yield and increasing the money supply it is known as ________ easing

quantitative

when the Fed buys long-term financial assets, thereby lowering their yield and increasing the money supply it is known as ___________ easing.

quantitative

when the economy faces a condition where it is overheating, the Fed __________ real interest rates.

raises

the development of credit cards, debit cards, and ATM machines has ________ the amount of money people need to carry out routine transactions.

reduced

the money that banks must hold in their vaults or on deposit with the Federal Reserve Bank is called

required reserves

the minimum values of the ratio bank reserves to bank deposits that the Fed allows commercial banks to maintain are known as:

reserve requirements

if real income falls, the money demand curve will _____________.

shift to the left

foward guidance refers to:

the Fed providing information about its future monetary-policy path

in the united states, the money supply is determined by

the Federal Reserve

after 2008, why could the Fed could no longer reduce different, more risky, interest rates in the economy by reducing the federal funds rate?

the federal funds rate was already at its zero lower bound

reserve requirements are the minimum values of _________ that the Fed allows commercial banks to maintain.

the ratio of bank reserves to bank deposits

a change in the requirement, an open market operation, or a change in the discount window rate are all examples of

the tools of monetary policy

the Federal Reserve can control the money supply:

- by changing commercial banks' reserve requirements - through discount window lending - through open-market operations

Factors that decrease the benefit of holding money, such as the introduction of ATM machines

- decrease the demand for money - shift the money demand curve to the left

factors that decrease the benefit of holding money, such as the introduction of ATM machines:

- decrease the demand for money - shift the money demand curve to the left

the federal funds rate:

- is the interest rate that commercial banks charge each other for very short-term loans - is closely watched by the public, politicians, the media and the financial markets

historically, the Fed has used monetary policy primarily to:

- keep inflation low - reduce output gaps

which of the following are consistent with the Taylor rule?

- modified versions of the Taylor Rule, where the Fed considers inflation forecasts, provide a better description of the Fed's behavior - according to the Taylor Rule, the Fed responds to output gaps AND the rate of inflation

which of the following is consistent with monetary-policy normalization?

- reduce holdings of the longer-term assets acquired during quantitative easing programs - raising the federal funds rate by raising the rate paid to banks on required reserves

if the Fed reaches the Zero Lower Bound,

- stimulating the economy by lowering the federal funds rate is not possible - the rate on federal funds rate is between 0% and 0.25%

money is a

- store of value - type of financial asset - way of holding wealth

the federal reserve can control the money supply:

- through open-market operations - by changing commercial banks' reserve requirements - through discount window lending

the decision about the forms in which to hold one's wealth is called the portfolio ____________ decision.

allocation

by changing the federal funds rate, the Fed is able to influence interest rates throughout the economy because there is a tendency for

all interest rates to move in the same direction

the decision about the forms in which to hold one's wealth is called the portfolio ________ decision.

allocation

in the united states _________ hold more than half of the total money stock.

businesses

discount window lending is the lending of reserves:

by the Federal Reserve to commercial banks

a higher real interest rate discourages firms from making ________ investments.

capital

an individual's ___________ money is the amount of wealth that individual chooses to hold in the form of money.

demand for

the interest rate that the Fed charges on loan they grant to commercial banks is called the ________ rate

discount

the interest rate that the Fed charges on loan they grant to commercial banks is called the ________ rate.

discount

the interest rate that the Fed charges on loans they grant to commercial banks is called the _________ rate.

discount

the money demand curve slopes _________ because as the nominal interest rate increases, the opportunity cost of holding money __________.

downward; increases

the Fed takes steps to eliminate _________ gaps because they lead to inflation.

expansionary

as the nominal interest rate rises, the quantity of money demanded _________.

falls

the money demand curve will shift to the left if the real price level _________.

falls

the ________ is the rate of interest that banks charge one another for very short-term (usually overnight) loans.

federal funds rate

real interest rates influence the behavior of

firms and households

when the Fed provides information about its future monetary-policy path, it is engaging in __________

forward guidance

the nominal interest rate can be thought of as the price of:

holding money

the raise in real interest rates influence

households and firms

If i denotes the nominal interest rate and p denotes the rate of inflation, then the real interest rate is given by:

i-p