Economics Block 2 Chapter 34 Summary
LO 34.1 Discuss how the equilibrium interest rate is determined in the market for money
Interest The price paid for the of money
Interest rates:
Many diferent interest rates
Speak as if only one interest rate
Determined by the money supply and money demand
Demand for money
Why hold money?
Transactons demand, Dt
o Determined by nominal GDP
o Independent of the interest rate
Asset demand, Da
o Money as a store of value
o Varies inversely with the interest rate
Total money demand, Dm
Transactions demand for money The demand for as a medium of exchange
Asset demand for money To the extant they want to hold money as an asset
total demand for money=transactions demans for money+ asset demand for money
Dm =Dt + D a
Interest rates
Equilibrium interest rate
o Changes with shif in money supply and
money demand
Interest rates and bond prices
o Inversely related
o Bond pays fxed annual interest
payment
o Lower bond price will raise the interest rate
LO34.2 describe the balance sheet of the federal reserve and the meaning of its major items
Federal reserve balance sheet
Assets
o Securites
o Loans to commercial banks
Labilites
o Reserves of commercial banks
o Treasury deposits
o Federal reserve notes outstanding
, Economics Block 2 Chapter 34 Summary
LO34.3 list and explain the goals and tools of monetary policy and tools of monetary policy
Tools of monetary policy
Open market operatons
o Buying and selling of government securites or bonds)
o Commercial banks and the general public
o Used to infuence the money supply
When the fed sells securites, commercial bank reserves are reduced
Open-market operations Consist of buying government bond U.S. securites) from or selling
government bonds to commercial banks and the general public
When the fed buys government bonds from commercial banks, it increases assets of the Fed and
increases the reserves of the commercial banks. This will increase the lending ability if the
commercial banks.
When the Fed buys government bonds from the
public, the efect is much the same. The assets of
the Fed increase, and as the public deposits the
funds into a commercial bank, its reserves and
lending ability will increase.
LO 34.1 Discuss how the equilibrium interest rate is determined in the market for money
Interest The price paid for the of money
Interest rates:
Many diferent interest rates
Speak as if only one interest rate
Determined by the money supply and money demand
Demand for money
Why hold money?
Transactons demand, Dt
o Determined by nominal GDP
o Independent of the interest rate
Asset demand, Da
o Money as a store of value
o Varies inversely with the interest rate
Total money demand, Dm
Transactions demand for money The demand for as a medium of exchange
Asset demand for money To the extant they want to hold money as an asset
total demand for money=transactions demans for money+ asset demand for money
Dm =Dt + D a
Interest rates
Equilibrium interest rate
o Changes with shif in money supply and
money demand
Interest rates and bond prices
o Inversely related
o Bond pays fxed annual interest
payment
o Lower bond price will raise the interest rate
LO34.2 describe the balance sheet of the federal reserve and the meaning of its major items
Federal reserve balance sheet
Assets
o Securites
o Loans to commercial banks
Labilites
o Reserves of commercial banks
o Treasury deposits
o Federal reserve notes outstanding
, Economics Block 2 Chapter 34 Summary
LO34.3 list and explain the goals and tools of monetary policy and tools of monetary policy
Tools of monetary policy
Open market operatons
o Buying and selling of government securites or bonds)
o Commercial banks and the general public
o Used to infuence the money supply
When the fed sells securites, commercial bank reserves are reduced
Open-market operations Consist of buying government bond U.S. securites) from or selling
government bonds to commercial banks and the general public
When the fed buys government bonds from commercial banks, it increases assets of the Fed and
increases the reserves of the commercial banks. This will increase the lending ability if the
commercial banks.
When the Fed buys government bonds from the
public, the efect is much the same. The assets of
the Fed increase, and as the public deposits the
funds into a commercial bank, its reserves and
lending ability will increase.
