Chp 8: study guide flash cards

Chain of events in the money creation process

1. Monetary base increases 2. Banks have excess reserves which they loan out, increasing deposits and the quantity of money. 3. The new deposits then create additional excess reserves.

Members of the Federal Reserve System's Board of governors hold ___ year staggered terms

14

The initial impact of the Fed's open market sale of government securities to banks is

a decrease in the banking system's reserve deposits at the fed

When the price level rises, the quantity of nominal money demanded will ____ and the quantity of real money will _____

increase; stay the same

in the short run, when the fed increases the quantity of money

bond prices rise and the interest rate falls

How are the nominal and real demands for money related to changes in the price level?

Nominal changes in money demand changes w/ prices. Real demand doesn't change.

the quantity theory of money predicts that in the ___, a 10% increase in the quantity of money leads to a 10% increase in ____

long run; price increase

The most direct way in which money replaces barter is through its use as a

medium of exchange

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

monetary policy

The opportunity cost of holding money is the

nominal interest rate on assets other than money

During periods of inflation, which function of money is most severely affected?

store of value

Money multiplier determines how much

the quantity of money will be expanded given a change in the monetary base

An increase in currency held outside the bank is

a currency drain

An open market operation occurs when the ____ buys of sells securities ____

Federal Reserve System; in the open market

in the money market, if the interest rate exceeds the equilibrium interest, there is a surplus of money. How is the surplus eliminated?

People buying bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.

when the nominal interest rate rises, the quantity of money demanded decreases because

people shift funds from money holdings to interest-bearing assets