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Week 15 - Monetary Policy

Terms in this set (32)

firms will invest when the _________________ is greater than the ________________
expected rate of return, real interest rate
when money supply increases,

1. interest rate __________________

2. investment demand __________________

3. Aggregate Demand ___________________

4. GDP _____________________
decreases, increases, increases, increases
when money supply decreases,

1. interest rate __________________

2. investment demand __________________

3. Aggregate Demand ___________________

4. GDP _____________________
increases, decreases, decreases, decreases
there is a _________________ relationship between interest and the quantity of investment demanded
negative
a financial instrument that obligates a borrower to repay interest to a lender
bond
when the fed ________ bonds, they ________ to the public
buys, pay
when the fed ___________ bonds, they _________ money from the public
sells, take
the fed buying bonds __________________ the money supply
increases
the fed selling bonds ___________________ the money supply
decreases
when the fed buys bonds it increases banks' _________________, increasing the money supply

the money multiplier further increases the money supply
reserves
when the fed sells bonds, it takes money, removing these funds from circulation, _________________ the money supply
decreasing
increasing the reserve ratio _________________ the money supply

- banks have less excess reserves to lend out
decreases
decreasing the reserve ratio _________________ the money supply

- banks can lend out more money
increases
the reserve ratio is rarely used as a monetary policy because it is __________________

- also effects the money multiplier
disruptive
the interest rate at which banks can borrow money directly from the federal reserve
discount rate
decreasing the discount rate _________________ borrowing from the Fed and the money supply
increases
increasing the discount rate ___________________ borrowing from the Fed and the money supply
decreases
banks with excess reserves can ____________ them to other banks
loan
the market for borrowing and lending excess reserves between banks
federal funds market
the interest rate that banks pay when borrowing reserves from other banks
federal funds rate
a bank with excess reserves could keep its reserves with the ________ and earn little to no interest

OR it could lend the reserves to other ____________, earning more interest
Fed, banks
the buying or selling of government securities (bonds)

- MOST often used
open market operations
expansionary monetary policy:

1. ________________ the money supply

2. _______________ the interest rate

3. ________________ investment

4. _________________ aggregate demand

5.__________________ Real GDP

6. _____________________ unemployment
inc, dec, inc, inc, inc, dec
contractionary monetary policy:

1. ________________ the money supply

2. _______________ the interest rate

3. ________________ investment

4. _________________ aggregate demand

5.__________________ Real GDP

6. _____________________ unemployment
dec, inc, dec, dec, dec, inc
increases in AD from increased investment are influenced by the __________________ multiplier

levels of investment are influenced by changes in the _____________ rate, which is determined in the market for money

the impact on the money supply from a change in reserves is influenced by the ______________ requirement
expenditures, interest, reserve
one advantage of monetary policy is that there is not a ___________________ lag
legislative
the period between an economic event occurring and the recognition of its events
recognition lag
the period between the enactment of a policy and the start of its effects

- shorter for monetary policy than fiscal policy
implementation lag
lower interest rates may not stimulate consumption or investment spending in individuals and firms are ____________________ about the future
pessimistic
higher interest rates may not reduce consumption or investment spending if individuals or firms are __________________ about the future
optimistic
when an increase in the money supply does NOT lower the interest rate
- usually bc interest rates are already near 0
- happened in Japan, and they had no way to stimulate the economy

- happens when individuals would rather hold money than invest
liquidity trap
contractionary monetary policy can help decrease __________________
inflation
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