Chapter 31 – Monetary Policy
The Demand for Money – The Opportunity Cost of Holding Money
What is the benefit of holding money? ________________________________________
What is the cost of holding money? ___________________________________________
The general rule is that one must sacrifice liquidity to get higher ______________.
When the interest rate is high, the opportunity cost of holding money __________ and when the interest
rate is low, the opportunity cost of holding money _______
How are short-term interest rates defined: __________________________________
Why is it difficult to find short-term interest rates that are much higher or lower than average in the
market? _________________________________________________
_____________________________________________________________________________
Long-term interest rates are on _____________________________________________
The Money Demand Curve-Why is the money demand curve downward sloping?
_____________________________________________________________________________
Why is the y-axis labeled with the short-term interest rate? ___________________
_____________________________________________________________________________
Shifts of the Money Demand Curve – What would cause a movement along the money demand curve?
______________________________________________________
How does each of the following events cause the money demand curve to shift?
Change in the Aggregate Price Level - ________________________________________
_____________________________________________________________________________
Change in real GDP - _________________________________________________________
Changes in Technology - _____________________________________________________
_____________________________________________________________________________
Changes in Institutions - _____________________________________________________
_____________________________________________________________________________
CYU 31-1 1. a.
b.
c.
2. a.
b.
c.
d.
p. 852, problem 2. a.
b.
c.
d.
d.
Money and Interest Rates – The Equilibrium Interest Rate What does the liquidity preference model
of the interest rate illustrate? ___________________
____________________________________________________________________________
Why is the money supply curve vertical? _____________________________________
_____________________________________________________________________________
How does the interest rate move toward equilibrium as the Fed adjusts the money supply?
______________________________________________________________
_____________________________________________________________________________
Two Models of Interest Rates? Are the loanable funds and money market graphs consistent with each
other? ________ (look at graph on p.856 to see why)
How does the Fed achieve a market interest rate by targeting a federal funds rate?
_______________________________________________________________________
_____________________________________________________________________________
CYU 31-2 1.
2.
p. 853 Problem 5.
6.
Chapter 31 – Monetary Policy, 31-3 & 4
Monetary Policy and Aggregate Demand – What happens to the AD curve when interest
rates are reduced? Explain all the steps. _________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
What happens to the AD curve when interest rates are increased? ____________________________
_____________________________________________________________________________
expansionary monetary policy - _________ money supply _________ interest rates _________ GDP
contractionary monetary policy - ________ money supply _________ interest rates ________ GDP
Does the change in I that results from the change in r multiply through the economy? ______
What is the relationship between interest rates targeted by the Fed and the output gap?
_____________________________________________________________________________
What is the relationship between interest rates targeted by the Fed and the inflation rate?
_____________________________________________________________________________
What is the Taylor rule for monetary policy? ___________________________________________________
What two goals of the Fed is the Taylor rule attempting to balance? __________________________
_____________________________________________________________________________
Why might inflexible application of the Taylor rule not necessarily be optimal? _____________
_____________________________________________________________________________
What is inflation targeting? ______________________________________________________________________
Describe two advantages of inflation targeting. _________________________________________________
________________________________________________________________________________________________________
What do critics point out is troublesome about inflation targeting (note the Fed doesn’t
use the method)? ___________________________________________________________________________________
CYU 31-3 1. a.
c.
b.
d.
e.
2.
Money, Output, and Prices in the Long Run
What is the effect of an increase in the money supply in the long-run? ________________________
________________________________________________________________________________________________________
a decrease in the money supply in the long-run? ________________________________________________
How does this lead economists to conclude that in the long-run, money is neutral – a
concept know as monetary neutrality? _________________________________________________________
________________________________________________________________________________________________________
What is the effect of money supply on the interest rate in the long-run? Explain.
________________________________________________________________________________________________________
________________________________________________________________________________________________________
Does Figure 31-13 offer evidence of that monetary neutrality is true in practice? How?
________________________________________________________________________________________________________
CYU 31-4 1. a.
b.
c.
d.
2.
p. 853 problem 6.
7. a.
8. a.
b.
13.
b.