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25 Cards in this Set

  • Front
  • Back
3 Goals of Monetary Policy

1) Full employment
2) Price stability
3) Economic growth
Many economists argue that the Fed's primary goal should be
Price stability
The Federal Reserve System is the instrument of
Monetary policy
The Fed has to balance these goals
Inflation vs. Recession
The Fed develops monetory policy suurounded by
A whirl of other political events and considerations
Expansionary Monetary Policy is designed to
Stimulate the economy
1) "loose" monetary policy
2) increase money supply
3) shifts aggregate demand right
Contractionary monetary policy
1) slow down the economy
2) tight monetary policy
3) decrease monetary policy
4) shifts aggregate demand left
What do the Fed do to balance these goals
1) manage the money supple itself
2) manipulate short term interest rates
Demand for money
The quantities of money that people would like to hold at various nominal interest rate, ceteris paribus.
1) Price/opportunity cost
2) downward sloping curve
Transaction Demand
People need to hold cash to carry out myriad daily transactions
Precautionary demand
People feel need to hold extra cash in bank to pay for unforeseen expenses.
Speculative Demand
People hold cash when current financial investments are relatively unattractive, in the expectation that future returns on investment will rise, and they will be ready to invest in them
Demand for money curve
downward sloping
Money Supply Curve
1) It is depiced as a vertical
2) It is independent of the interest rate
3) It is assumed that this is the quantity of money supplied to the economy by the Fed
Higer than equilibrium
Rate will fall to equilibrium
Lower then equilibrium
Rate will rise to equilibrium
Price rule
Conducting monetary policy in order to keep price increase in basic commodities (incl. gold) within a low range.
1) Fed's primary concern appears to be price stability
The Equation of Exchange - Money & Price
M x V = P x Q
Total Spending = Nominal GDP

M = Quantity of money
V = Velocity of money

M x V = Total spending

P = Price index (economy's price level)
Q = Aggregate output of goods and services

P x Q = nominal GDP
Quanitity Theory of Money
A theory based upon the equation of exchange; shows that the effect of a change in the money supply is a proportional change in the price level; assumes velocity and aggregate output remain constant.
Velocity of money
Is independent of the supply of money in the long run, therefore a constant
Aggregate Ouput (Q)
Is independent of the supple of money in the long run; Q depends on productive capacity of economy which is assumed to be at max, therefore a constant
Fed tried to buy back government debt with reserves
1) raise price levels
2) Cause inflation
3) Erode value of savings and wealth
Monetarism is a school of thought that emphasizes
1) inportance of the quantity of money in the economy
2) a rule for monetary policy
Monetarists acknowledge the existence of
1) short run quantity of money may affect velocity and aggregate output in short run
2) Change in Q = decrease money supple - economy slow down
3) Change in V = speed up money turnover
Monetarists recommend a "monetary rule"
Fed increase money supply at steady rate (equal to or slightly greater than long run growth in aggregate output)

1) Full employment growth
2) zero inflation