Untitled Flashcards Set

Money Demand

The total amount of money demanded for transactions and as an asset, which is inversely related to the nominal interest rate.

Shifters of the Demand for Money Curve

Factors that can cause the demand for money to increase or decrease, including price level, real GDP, and transaction costs.

Monetary Base

The total amount of money in a nation's economy determined by its central bank.

Money Supply and Nominal Interest Rate

The money supply is independent of the nominal interest rate.

Three Tools of Monetary Policy

The Federal Reserve controls monetary policy primarily through open market operations, changing the discount rate, and adjusting the required reserve ratio.

Money Market

The marketplace for the supply and demand of money among institutions.

Money Market Equilibrium

Occurs at the interest rate where the quantity of money demanded equals the quantity of money supplied.

Investment Demand

The desired quantity of investment spending by firms on physical capital for productivity and profitability.

Inverse Relation of Interest Rate and Investment Demand

As the nominal interest rate increases, the quantity of investment demanded decreases.

Expansionary Monetary Policy

A policy designed to combat recession by lowering interest rates to stimulate aggregate demand, real GDP, and reduce unemployment.

Effects of Increasing Money Supply

Increases in money supply tend to lower interest rates, boosting private consumption and investments.

Contractionary Monetary Policy

A policy aimed at controlling inflation by raising interest rates to reduce aggregate demand.

Effects of Decreasing Money Supply

Decreases in money supply lead to higher interest rates, which can reduce private consumption and investment.

Open Market Operations (OMOs)

A monetary policy tool involving the buying or selling of securities by the Federal Reserve to influence the money supply.

Federal Funds Rate

The interest rate charged for short-term loans between banks.

Discount Rate

The interest rate that commercial banks pay on short-term loans from the Federal Reserve.

Lowering the Discount Rate

Increases excess reserves in banks and expands the money supply.

Raising the Discount Rate

Decreases excess reserves in commercial banks and contracts the money supply.

Required Reserve Ratio

The percentage of deposits that banks are required to hold as reserves, affecting money supply.

Lowering the Reserve Ratio

Increases excess reserves in banks, thus expanding the money supply.

Increasing the Reserve Ratio

Decreases excess reserves in banks, thus contracting the money supply.

Demand for Loanable Funds

The quantity of credit required by borrowers at every real interest rate.

Inverse Relationship of Real Interest Rates and Loanable Funds

As real interest rates increase, the quantity of loanable funds demanded decreases.

Transaction Costs

Costs associated with making an economic exchange that can shift the demand for money.

Economic Factors Influencing Money Demand

Factors such as real GDP and price levels, which can influence the overall demand for money.