24404716
Description
Flashcards by Sophia Lynch, updated more than 1 year ago
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Created by Sophia Lynch
over 4 years ago
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| Question | Answer |
| What theory did Keynes develop? | The theory of liquidity preference to explain what factors determine the economy's interest rate. |
| What do interest rates do according to the theory of liquidity preference? | Interest rates adjust to meet the supply and demand for money. The equilibrium for MS and MD determine the nominal interest rate. |
| What 4 factors affect the demand for money? | 1. The level of income 2. Interest rates 3. Inflation 4. Uncertainty about the future |
| What is the Transactions Motive? | Money is required for a transaction to occur. As income/GDP increase, the TRANSACTIONS DEMAND for money also increases. |
| What is the Precautionary Motive? | People often demand money as a precaution against an uncertain future. |
| What is the Speculative Motive? | When one holds money instead of investing it or lending it in a time when this seems risky. |
| What are open-market operations? | Buying and selling of securities to increase/decrease funds in the market. (we don't have this) |
| What is the reserve requirement ratio? | The portion of deposits that banks must have on hand as cash set by the central bank. |
| What does a decrease in the reserve ration result in? | Decreases reserves hence increasing the availability of loans and hence the money supply, expanding the economy and increasing inflation. |
| What is the discount rate? | The interest rate charged to commercial banks and other depository institutions for loans received from the central bank, primarily to meet reserve requirements when their cash on hand is low before the close of business. |
| What is expansionary monetary policy and contractionary monetary policy? | EMP = RBNZ try increase money supply CMP = RBNZ try decrease the money supply |
| Does the RBNZ have full control over the money supply? | No, because they cannot control how much is in reserves at banks and household's preference for money demands. |
| Why does the RBNZ target the OCR rather than the money supply? | Because the money supply has too many factors effecting it. Controlling the OCR is more straight-forward. |
| What is this system called in which banks keep an ORR? | Fractional Banking |
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