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