EC225 Chapter 16 Learning Objectives (You do not have to read pages 349-350 and 354-355)
1. Define the following terms:
Transaction demand for money- holding money as a medium of exchange to make payments. The level varies directly with GDP
Precautionary demand for money- holding money to meet unplanned expenditures and emergencies
Asset demand for money- holding money as a store of value instead of other assets such as corporate bonds and stocks
Quantitative Easing- federal reserve open market purchases intended to generalize and increase in bank reserves at a nearly zero interest
Federal Funds market- a private market in which banks can borrow reserves from other banks that want to lend them. Federal funds are usually lent for overnight use
Federal funds rate- the interest rate that depository institutions pay to borrow reserves in the inter-bank federal funds market
Discount rate- the interest rate that the federal reserve charges for reserves that it lends to depository institutions
FOMC directive- a document that summarizes the federal open market committee’s general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth
Trading desk –an office at the federal reserve bank of new york charged with implementing monetary policy strategies developed by the federal open market committee
Expansionary monetary policy- business fluctuation in which the pace of economic activity is speeding up
Contractionary monetary policy- a business fluctuation during which the pace of national economic activity is slowing down
Credit policy of the Fed – federal reserve policymaking involving direct lending to financial and nonfinancial firms
2. Identify examples of the following:
Transaction demand for money- holding money for regular purchases
Precautionary demand for money- savings account to hold money for house damages or
Asset demand for money- holding money as a store of value
Expansionary monetary policy-
Contractionary monetary policy-
3. Explain why the demand for money curve is downward sloping with respect to the interest rate.
4. Use aggregate supply/aggregate demand analysis to show the impact of expansionary monetary policy (figure 16-3).
AD1 shifts out to AD2. E2 new equilibrium
5. Use aggregate supply/aggregate