chapter 16 - money supply

The intended outcome of increasing the money supply is

an increase in excess reserves in the commercial banking system and a decline in the federal funds rate

Quiz: market for money diagram Question. (see diagram in definition)

based on diagram: Multiple Choice 1. buy bonds, which would cause bond prices to rise and the interest rate to fall. Correct 2 buy bonds, which would cause bond prices to fall and the interest rate to rise. 3 sell bonds, which would cause bond prices to fall and the interest rate to fall. Incorrect 4 have insufficient liquidity, which would cause them to reduce their spending on consumer goods.

the rate at which the amount of money demanded and money supplied are equal is called

equilibrium rate

When the Fed engages in a ________________________ monetary policy; when it is increasing the money supply to reduce interest rates and increase investment spending and real GDP

expansionary monetary policy

When interest rates increase, bond prices _________ (pg 325)

fall. And when interest rate fall bond prices rise.

the demand of money depends on...

i. transactions demand ii. assets demand - (store of value)the extent to which people want to hold money as an asset

expansionary monetary policy does this:

increases money supply, lower interest rates expand real GDP

The intersection of demand and supply determines the equilibrium price in the market for money. The equalibrium price is the equilibrium _______________rate.

interest

interest on excess reserves

interest rate paid by the Fed Reserve on bank excess reserves

Federal Funds rate is the

interest rate that us banks charge one another on overnight loans made out of their excess reserves

What has become the dominant component of US national stabilization policy? (pg 323)

monetary policy : two key advantages of it: 1.speed and flexibility 2 isolation from political pressure

A decrease in the supply of money will

raise the interest rate

Government / corporate Bonds are also called

securities

Refer to the diagram of the market for money. Given Dm and Sm, an interest rate of i3 is not sustainable because the

see image: then multiple choice: 1.supply of bonds in the bond market will decline and the interest rate will rise. 2.demand for bonds in the bond market will rise and the interest rate will fall. Correct 3.demand for bonds in the bond market will decline and the interest rate will rise. 4.supply of bonds in the bond market will increase and the interest rate will decline incorrect

Asset demands can be in many forms, like

stocks, bonds or money

Asset demands defined

the amount of money ppl want to hold as a "store of value" this amount varies inversely (opposite)with the interest rate

Reverse repo

the dealer finds an investor holding government securities and buys them with an agreement to resell them at a specified higher price on a future date.

cyclical asymmetry

the idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession

Define Collateral

the pledge of specific assets by a borrower to a lender/with the understanding the the lender will get to keep the asset if the borrower fails to repay the loan

Interest defined

the price paid for the use of borrowed money (it is also the price that borrowers pay lenders for transferring purchasing power to the future) Or the cost of the Use of $1 for 1 year

Total Demand for money (dm, pg 324) defined

total sum of the transaction demand and assets demand

The amount of money people want to hold for use as a medium for exchange (paying bills) is called

transactions demand for money.

quantitative easing

when the Fed/central bank buys longer-term government bonds or other securities held by banks to stimulate the economy

An increase in the money supply will

will lower the interest rate, increasing investment, aggregate demand, and equilibrium GDP.

To increase the money supply, the Fed will take some combination of the following actions

(1) buy or initiate repos of government securities from banks and the public in the open market, (2) lower the legal reserve ratio, (3) lower the discount rate, and (4) reduce the interest rate that it pays on reserves

Four tools the Fed can use to alter the reserves of the commercial banks

1. open-market operations 2. research ratio 3. discount rate 4. interest on reserves

(from Quiz). Which of the following statements is correct? Other things equal,

1.a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged. 2. deflation will shift both the transactions demand curve for money and the total money demand curve to the left. Correct 3.inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged. Incorrect 4. a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.

Taylor Rule

A monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve System should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

Repo

A repurchase agreement is a short term money loan made by a lender to a borrower the is collateralized with bonds pledged by the borrower. This term is how the lender would view the transaction

liquidity trap

A situation in a severe recession in which the Fed's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand.

zero lower bound problem

A situation in which the central bank is unable to lower short-term interest rates further because they have hit a floor of zero. If they went lower -what would happen? ppl would withdraw their money

the _______________rate is the interest rate the Fed Reserve Bank charges on loans that they grant to commercial banks (pd 332)

Discount Rate

zero interest rate policy ZIRP

Fed aimed monetary policy to keep short-term interest rates near zero to stimulate the economy

Restrictive money policy

Fed reserve action to reduce money supply

who controls the supply of money

Federal Reserve - it won't go up and down as interest rates change

A central banks changing of the money supply to influence interest rates and help the economy is called the

Monetary Policy

The asset demand for money

Multiple Choice 1 varies inversely with the level of real GDP. 2 is unrelated to both the interest rate and the level of GDP. Incorrect 3 varies inversely with the rate of interest. Correct 4 varies directly with the level of nominal GDP.

Quiz: The asset demand for money is most closely related to money functioning as a

Multiple Choice 1.medium of exchange. Incorrect 2 measure of value. 3 unit of account. 4 store of value. Correct

during times of rising inflation the Fed will undertake __________ monetary policy or "tight money policy" (pg 323)

Restrictive monetary policy (?)

Who is the largest holder of US gov securities

The Federal Reserve

reserve ratio

The fraction of checkable deposits that each commercial bank must hold as Reserves at its local federal reserve bank or in its own bank vault.

Prime interest rate

The interest rate that banks use as a referent point for a wide range of loans to businesses and individuals

open market operations

The purchases and sale of us government securities that the Fed undertakes in order to influence interest rates and money supply- (one method of monetary policy)

Central money supply influences the economy in what way

Through their effect on aggregate demand by altering - the cost of financing investment expenditures and durable consumption -asset values; both financial and long lived real (home prices)