Money Market
What happens to the demand for money when the interest rate rises?
The demand for money increases
What happens to the supply of loanable funds when saving increases?
The supply of loanable funds increases
What does the foreign exchange market determine?
Exchange rates
What happens to aggregate demand when consumption increases?
AD shifts right
Who controls the money supply in the US?
The Federal Reserve
Who supplies loanable funds?
Savers (households, firms, government, etc.)
What happens to the USD when foreign investors buy more domestic assets?
The USD appreciates
If real interest rates rise, what happens to investment and aggregate demand?
Investment falls and AD shifts left
What happens to the money supply when the Fed sells bonds?
The money supply decreases
What represents the demand for loanable funds?
Investment (borrowing)
What happens to the value of a currency when more of it is supplied in the foreign exchange market?
The currency depreciates
If the Fed buys bonds, what happens to the interest rate and aggregate demand?
Interest rates fall and AD shifts right
What happens to interest rates when the Fed buys bonds?
Which interest rate is affected (real/nominal) and what happens when demand for loans increase?
Real interest rate increases
What happens to a currency when domestic interest rates are lower than foreign interest rates?
The currency depreciates
How does a higher interest rate affect net exports?
Higher interest rates lead to more foreign capital inflows and decreased net exports
This type of interest rate is determined in the money market.
The nominal interest rate
What is the effect of a government budget deficit on the loanable funds market?
It increases demand for loanable funds and raises real interest rates
What happens to net exports when a currency depreciates?
Net exports increase
A fall in interest rates leads to what full chain reaction in the economy (capital flows, currency, net exports, AD)?
capital outflows increase / inflows decrease → currency depreciates → net exports increase → AD increases