Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
25 Cards in this Set
- Front
- Back
3 Goals of Monetary Policy
|
FEP
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)
Result 1) Full employment growth 2) zero inflation |