Demand for Money
What happens to the quantity demanded of money when interest rates increase?
What is quantity demanded falls because individuals would prefer to have interest-earning assets instead?
What are the three money demand shifters?
What are:
Changes in price levels, changes in income, changes in technology
The amount of money that the public wants to hold in the form of cash will
a. be unaffected by any change in interest rates or the price level
b. increase if interest rates increase
c. decrease if interest rates increase
d. increase if the price levels decreases
e. decrease if the price level remains constant
What is c?
Who is the U.S. money supply set by?
Who is the central bank?
What happens to the quantity demanded when interest rates decrease?
What are the axes of the graphs for demand for money?
What is nominal interest rate (ir) on the y-axis and quantity of money (billions of dollars) on the x-axis?
Which factor is a shifter of the demand for money?
a. Reserve requirement
b. price level
c. Discount rate
d. Open market operations
What is b?
What does expansionary policy do?
What is increases money supply, decreases interest rates, and increases investment/AD?
What is the relationship between the interest rate and the quantity of money demanded?
What is an inverse relationship?
A temporary shortage of money will occur at 5% interest and will cause the interest rate to rise to 10%. How does this affect AD?
What is
Decrease money supply -> increase interest rate -> decrease investment -> decrease AD
What is the result when the nominal interest rate ensures the quantity of money demanded equals the quantity supplied?
a. Surplus
b. disequilibrium
c. shortage
d. equilibrium
What is d?
What happens to the interest rate if the Fed increases the money supply?
What is the vertical supply curve shifts to the right, leading to a lower nominal interest rate?
What are the transaction demand for money and the asset demand for money?
Transaction: what is when people hold money for everyday transactions
Asset: what is when people hold money since ti is less risky than other assets
Why is the money supply curve vertical?
What is as the federal bureau directly controls it, setting a fixed quantity of money
What does nominal interest rate consist of?
a. Expected inflation rate only
b. Inflation rate - real interest rate
c. Real interest rate only
d. Real interest rate + expected inflation rate
What is d?
What is monetary policy?
What is when the Fed is a nonpartisan government office that adjusts the money supply to influence the economy?
What is the opportunity cost of holding money in your pocket or checking account?
What is the interest you could be earning from other financial assets like stocks, bonds, and real estate?
A temporary surplus of money will occur at 5% interest and will cause the interest rate to fall to 2%. How does this affect AD?
What is:
Increase money supply -> decrease interest rates -> increases investment -> increases AD
Which action is used by the central bank to influence the money supply?
a. Modifying income taxes
b. Adjusting the reserve requirement
c. Changing sales tax
d. Redefining currency values
What is b?
What are the 3 shifters?
What are open market operations, reserve requirements, and discount rates?