Part 3: Monetary Theory and Policy

Demand for Money

The relationship between the interest rate and how much money people choose told.

Equation of Exchange

The quantity of money, M, multiplied by its velocity V, equals nominal GDP, which the product of the price level, P, and read GDP, Y or

M x V = P x Y

Velocity of Money

The average number of times per year each dollar is used to purchase final goods and services. Eight and a half.

Quantity Theory of Money

If the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP.

Stress Test

Bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy.

Shadow Bank System

Financial institutions, such as mortgage companies and brokerage firms, that do not rely on customer deposits to make loans.

Quantitative Easing

Fed purchases of long-term and sets to stabilize financial markets, reduce long-term interest rates and improve the investment environment.