9. Monetary Policy (Unit 4)
money market
A market in which the demand for and supply of money determine an interest rate, or opportunity cost of holding money balances.
Money Market Equilibrium
Ms = Md
monetary policy
The actions taken by a country's central bank to influence the supply of money and credit in the economy.
required reserves
The amount of reserves that a bank must keep on hand to meet regulatory requirements; equal to deposits times the reserve requirement.
spread
The difference between the interest rate a bank earns on a loan and the interest rate it pays.
gross investment (I)
The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment.
discount rate
The interest rate at which banks can borrow money directly from the Federal Reserve.
Expenditures Multiplier Formula
△Y/△Expenditures 1/(1 - MPC) 1/MPS
Change in Money Supply formula
(1/Reserve Requirement) * Change in Reserves
Federal Open Market Committee (FOMC)
A committee of the Federal Reserve System that is responsible for monetary policy decisions, specifically for open market operations for the Federal Reserve System. The FOMC consists of the Federal Reserve Board, the president of the New York Fed, and 4 of the other 11 regional bank presidents.
real gross domestic product (real GDP, Y)
A measure of the constant dollar value of all final goods and services produced in a country during a fixed period of time; sometimes called inflation-adjusted GDP. When an economy is in equilibrium, real GDP equals income, Y.
aggregate demand (AD)
A schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and the price level, all else held constant.
aggregate supply (AS)
A schedule or curve that represents the relationship between the quantity of real GDP supplied in the economy and the price level. Also called short-run aggregate supply.
Money Multiplier Formula
Change in money supply / Change in reserves OR 1/Reserve Requirement
Required Reserves Formula
Deposits * Reserve Requirement (rr)
Net Exports Formula
Exports (X) - Imports (M) NX = X - M
Aggregate Demand and Expenditures
Multiplier(E) * △Expenditures
Real GDP Expenditures
Real GDP (Y) = Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) Y = C + I + G + NX
contractionary monetary policy
The actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation. Sometimes referred to as "tight money"
expansionary monetary policy
The actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment. Sometimes referred to as "easy money."
expenditures multiplier
The effect that a $1 change in expenditure has on real GDP; calculated as the ratio of the total change in real GDP due to a change in initial expenditure.
reserve requirement (rr)
The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve
federal funds rate
The interest rate that banks pay when borrowing reserves from other banks.
interest rate on reserves
The interest rate that the Federal Reserve pays when banks hold reserves at the Fed
federal funds market
The market for borrowing and lending reserves between banks.
investment demand
The negative relationship between the quantity of new physical capital demanded by firms and the prevailing interest rate.
interest rate
The payment made to agents that lend or save money, expressed as an annual percentage of the monetary amount lent or saved. Sometimes called nominal interest rate or price of money.
implementation lag
The time between when a policy is enacted and when it has its full effect on the economy
liquidity trap
a situation in which increasing the money supply does not lower interest rates, due to a flattening of the money demand curve
money multiplier
the amount by which a $1 change in reserves will change the money supply
excess reserves
the amount of reserves that a bank can lend out to earn interest; equal to total reserves minus required reserves
cyclical asymmetry
the idea that the aggregate demand for goods and services is more responsive to contractionary monetary policy than to expansionary monetary policy. As a result, monetary policy may be more effective when used to control inflation than to reduce unemployment
prime rate
the lowest commercially available interest rate
open market operations
the purchase or sale of government securities by a central bank; a key tool of monetary policy used to influence the money supply and interest rates
recognition lag
the time between when an event affects an economy and when we recognize that effect in the data collected
Excess Reserves Formula
total reserves - required reserves
