Chapter 33: Interest Rates and Monetary Policy

Consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy

The price paid for the use of money

The demand for money as a medium of exchange

The ________ will discourage investment, lowering aggregate demand and restraining demand- pull inflation.

Holding money as an asset

The total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate

Buying of government bonds from, or the selling of government bonds to, commercial banks and the general public

Can be manipulated in order to influence the ability of commercial banks to lend

Federal Reserve Banks charge interest on loans they grant to commercial banks

The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day periods

The rate of interest that banks charge one another on overnight loans made from temporary excess reserves

Lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals

Increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases

Assumes that the Fed has a 2 percent “target rate of inflation” that it is willing to tolerate

Consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy

The price paid for the use of money

The demand for money as a medium of exchange

Holding money as an asset

The total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate

Government bonds that have been purchased by the Federal Reserve Banks

he Fed requires that the commercial banks hold reserves against their checkable deposits

Buying of government bonds from, or the selling of government bonds to, commercial banks and the general public

Can be manipulated in order to influence the ability of commercial banks to lend

Federal Reserve Banks charge interest on loans they grant to commercial banks

The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day periods

The rate of interest that banks charge one another on overnight loans made from temporary excess reserves

Lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals

Increase the interest rate in order to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases

Assumes that the Fed has a 2 percent "target rate of inflation" that it is willing to tolerate

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