Monetary Policy Lecture Notes

These flashcards cover key concepts related to monetary policy, including definitions, relationships, and differences between economic theories.

What is the main goal of monetary policy?

To influence macroeconomic outcomes through control of the money supply and interest rates.

What is M1 in the context of money supply?

Currency held by the public, plus balances in transactions accounts.

What happens to money demand when interest rates fall?

Money demand increases as people are willing to hold more cash at lower interest rates.

What are the three types of money demand?

Transactions demand, precautionary demand, and speculative demand.

What is the relationship between money supply and interest rates?

Increasing the money supply generally lowers interest rates; decreasing it raises interest rates.

What is a liquidity trap?

A situation where lowering interest rates further does not stimulate additional borrowing or spending.

How do Keynesians and Monetarists differ in their views on monetary policy?

Keynesians believe monetary policy can affect short-term rates and spending; Monetarists believe it primarily affects price levels and not real output.

What is the equation of exchange?

MV = PQ, where M is money supply, V is the velocity of money, P is the price level, and Q is the quantity of output.

What role does the Fed play in controlling interest rates?

The Fed uses its policy tools to adjust the money supply, thereby influencing interest rates.

What is the 'natural' rate of unemployment according to Monetarists?

The long-term rate of unemployment that is unaffected by short-run monetary policy interventions.