Chapter 15 - Monetary Policy ECON 115

cons of using cash

yields no return, gives up interest that could’ve been earned by putting money into an asset like guaranteed investment certificates

short-term interest rates

the interest rates on financial assets that mature in less than a year

cons of using cash

yields no return, gives up interest that could’ve been earned by putting money into an asset like guaranteed investment certificates

short-term interest rates

the interest rates on financial assets that mature in less than a year

long-term interest rates

interest rates on financial assets that mature a number of years in the future

higher the interest rate

higher the opportunity cost of holding money

lower the interest rate

lower the opportunity cost of holding money

what shifts the money demand curve

changes in the aggregate price level, changes in real GDP, changes in credit markets and banking technology, changes in institutions

liquidity preference model of the interest rate

the interest rate is determined by the supply and demand for money

what does the money supply curve show

the quantity of money supplied varies with the interest rate

the BOC sets what

target for the overnight rate

the target for the overnight rate

desired level for the overnight rate

expansionary monetary policy

monetary policy that increases aggregate demand (loose monetary money policy)

contractionary monetary policy

monetary policy that reduces aggregate demand (tight monetary policy)

monetary neutrality

changes in the money supply have no real effect on the economy

money is _ in the long run

neutral

quantity equation represents

relationship between nominal GDP and the amount of money exchanges

the quantity equation is

M (level of nominal money supply) x V (velocity of money → average number of times a dollar is spent per period) = P (aggregate price level) x Y (aggregate real output → real income)