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