chapter 14

Flashcards on Monetarism, Velocity of Money, and Monetary Policy.

Monetarism

Economic theory emphasizing the role of governments in controlling the money supply.

Core Belief of Monetarism

Changes in the money supply are the main drivers of economic performance, particularly price levels and output.

Velocity of Money

The number of times a unit of money is used to purchase final goods and services within a given time period.

Velocity of Money Formula

V = (P × Q) / M

Equation of Exchange

MV = PQ

Expansionary Monetary Policy

Buying bonds, lowering discount rate, decreasing reserve requirement.

Impact of Expansionary Policy

Increases aggregate demand (AD) and lowers interest rates.

Contractionary Monetary Policy

Selling bonds, raising the discount rate, or increasing reserve requirements.

Impact of Contractionary Policy

Decreases aggregate demand (AD) and raises interest rates.

Inside Lag

Time delay in recognizing an economic problem and implementing policy.

Outside Lag

Time delay before the effects of a monetary policy are felt in the economy.

Typical Monetary Policy Lag

6–18 months before full economic impact.

Transactions Demand for Money

Demand for money for everyday purchases.

Asset Demand for Money

Holding money as an alternative to bonds or investments.

Money Supply

Vertical on a graph, fixed by the central bank.

Opportunity Cost of Holding Money

The potential interest income lost when holding money instead of investing.

Impact of Rising Interest Rates on Money Demand

Quantity of money demanded falls (downward-sloping money demand curve).

Impact of Rising Nominal Interest Rate

Money demand decreases; investment drops, AD decreases.

Impact of Falling Nominal Interest Rate

Money demand increases; investment rises, AD increases.

Total Money Demand

Transactions Demand + Asset Demand

Impact of Higher Nominal GDP on Money Demand

Higher money demand (more transactions).

Impact of Higher Interest Rate on Money Demand

Lower money demand (higher opportunity cost).

Short-Term Money Market

Where Fed actions shift money supply and change the nominal interest rate.

Loanable Funds Market

Supply (savers), demand (borrowers/investors), real interest rate.

Key elements of the AD-AS Model

AD (investment/consumption), AS, price level, output.