Quiz 6: Money and Loanable Funds Market

Opportunity cost of holding money

interest rate

Interest rates

a fee that is paid when money is borrowed/lended out to someone.

Money market

- Quantity of money individuals want to hold is negatively related to interest rate.

Money demand curve

- Relationship between the quantity of money demanded and the interest rate.

Shifts of the money demand curve

- changes in aggregate price level, changes in real GDP, changes in banking tech, changes in banking institutions.

Money supply curve

- Relationship between the quantity of money supplied and the interest rate.

Shifts of the money supply curve

- Only the federal reserve.

Open market operations

- The Fed buys or sells bonds to inject money into the banking system.

Discount rate

- The Fed changes the interest rate it charges banks for short-term loans.

Reserve requirements

- The Fed alters the percentage of deposits banks must hold in reserve.

Expansionary monetary policy

- Increases amount of money in circulation. Buy bonds.

Contractionary monetary policy

- Decreases amount of money in circulation. Sell bonds.

Federal funds rate

- interest rate that banks charge other banks for loans.

Loanable funds market

- describes the behavior of savers + borrowers

Demand for loanable funds

- The quantity of credit (loans) wanted and needed at every real interest rate by borrowers in an economy.

Real interest rates ⬆ investment ⬇

Real interest rates ⬇investment ⬆

Shifts of the demand for loanable funds

- Changes in perceived business opportunities, investment tax credit, changes in gov borrowing, crowding out.

Crowding out

- Gov drives ⬆the interest rate, hence investment spending goes 📉

Supply of loanable funds

- The idea that lending becomes more attractive at higher 📈interest rates, leading to a 📈higher supply of loanable funds.

Shifts of the supply for loanable funds

- changes in private savings behavior, changes in capital inflow.