Monetary Policy in Economics

These flashcards cover key concepts from the lecture on monetary policy, including definitions and explanations of important terms and theories.

Money Demand Curve

The relationship between the quantity of money demanded and the interest rate; it slopes downward, meaning higher interest rates decrease the quantity of money demanded.

Liquidity Preference Model

A theory that determines the interest rate by the supply and demand for money, combining the money demand curve (MD) and the money supply curve (MS).

Opportunity Cost of Holding Money

The loss of potential gain from other investments when cash is held instead of earning interest from interest-bearing assets.

Expansionary Monetary Policy

Monetary policy that increases aggregate demand by increasing the money supply and lowering interest rates.

Contractionary Monetary Policy

Monetary policy that reduces aggregate demand by decreasing the money supply and raising interest rates.

Federal Reserve

The central banking system of the United States, responsible for implementing monetary policy.

Federal Funds Rate

The interest rate at which depository institutions lend reserve balances to other depository institutions overnight.

Interest-Bearing Assets

Financial assets that earn interest, such as certificates of deposits (CDs) or treasury bills.

Monetary Neutrality

The theory that changes in the money supply only affect nominal variables, such as prices, and not real variables like output in the long run.

Open-Market Operations

Activities by the Federal Reserve to buy or sell government bonds in the market to influence the money supply and interest rates.