Monetary Policy and Aggregate Demand

Flashcards covering key vocabulary related to monetary policy and aggregate demand.

Federal Reserve

The central bank of the United States that conducts monetary policy.

Federal Funds Rate

The interest rate at which banks lend money to each other.

Real Interest Rate

The nominal interest rate adjusted for inflation, calculated as r = i - πe.

Monetary Policy Curve (MP curve)

A curve that shows how real interest rates respond to the inflation rate.

Taylor Principle

The principle stating that to stabilize inflation, nominal interest rates must increase more than any rise in expected inflation.

Aggregate Demand Curve (AD Curve)

The curve that represents the relationship between inflation rate and aggregate demand in equilibrium.

IS Curve

The curve that links the real interest rate set by monetary policy to equilibrium output.

Liquidity Preference Theory

The theory developed by Keynes that explains the demand for money based on the preference for liquidity.

Real Money Balances

The quantity of money measured in real terms, reflecting how much money people want to hold.

Demand Curve for Money

A curve that shows the relationship between the quantity of money demanded and interest rates, which slopes downward.

Supply Curve for Money

A vertical line that indicates the quantity of real money balances supplied at each price level, fixed by the Fed.

Nominal Interest Rate

The stated interest rate on a loan or financial product, not adjusted for inflation.

Average Balance

A measure used to determine the liquidity preference and demand for money.

Equilibrium in the Money Market

Occurs when the quantity of real money balances demanded equals the quantity supplied.