AP Macro Unit 4 test Graph

Money Market Graph?

shows the supply and demand for money

Why are cars, stocks, and bonds not actually money?

because they have low liquidity

Describe the money market graph 4

-Nominal Interest Rate, on Y

-Quantity of Money, on X

-Money Demand is downward sloping

-Money supply is vertical

Why is money demand downward sloping? 2 reasons

Transaction Demand and Asset Demand

what is transaction demand?

You need money in your pocket or your checking account so that you can buy stuff

What is asset demand?

people prefer to have liquid assets as preferred to having assets like stocks or bonds that are less liquid

What are the demand shifters? 3

1. An increase in price level shifts right because people need more money to be able to pay for the higher price

2. Income, if it increases the demand for money will increase, more people need more of it to pay their employees

3. Tech, Apple Pay decreases the need for cash

What are the supply shifters? 3

1. Reserve Requirement

-If the RR decreases, they can lend out more money, the money supply would increase

2. Discount rate(IR fed charges banks)

-If this decreases, it is cheaper for banks to borrow money, increases supply of money

3. Open Market Operations (Fed sells or buy bonds to bank)

-Fed buys bonds the money supply gets bigger, fed sells bonds money supply gets smaller

Expansionary Monetary Policy

The fed increases the money supply, this will decrease interest rates, and increase AD

Contractionary Monetary Policy

-Designed to flight inflation

-The fed decreases the money supply, increases interest rate, decreasing investment so AD decreases.

Explain the Reserve Market Graph?

-Federal Funds Rate, on the Y

-Quantity, on the X

-Demand is downward sloping

-Supply is vertical

What is to the left of the supply?

limited reserves

what is to the right of money supply line

?

ample reserves

practice problem: There are ample reserves and the federal funds rate is at 2%. If the central bank wants to lower interest rates to stimulate the economy, what can they do?

use expansionary monetary policy, by decreasing the interest on reserves

If they are trying to fight inflation what monetary policy should they do?

contractionary monetary policy, by increasing interest rates on reserves

When there is limited reserves, the fed can do what?

Buy bonds (increase ms and lower ir), Sell bonds (decrease ms, increase ir), Change discount rate, change interest on reserves

when there is ample reserves what can the fed do?

change administered rates and change amount of money supply

what is m1?

currency in circulation, demand deposits, and other liquid deposits

what is m2?

M1 as well as other liquid assets that can be readily converted into cash. Savings deposits, time deposits, and money market funds.

What is the monetary base?

the total amount of a country's currency in circulation plus the reserves held by commercial banks at the central bank