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Business Learning Center – Econ 102 (Eudey) – Chapter 14 (Money and Interest Rate)
Tutor: Kanit Kuevibulvanich
This week, you will learn:
- Money Demand and Money Supply: Definition, determinants, shifts, money market
equilibrium and interest rate, review of interest rate and bond price
- Federal Reserve and Monetary Policy: Policy interest rates, effects on money supply
- Monetary Policy and Aggregate Demand: Transmission mechanism, domestic and
international effects, exchange rates, limitation of monetary policy
Money Demand, Money Supply, and Interest Rate
1. What are the three motives for holding money? Explain each motive with example.
2. Money demand is a relationship between ________________ and ________________, which is
[ upward sloping / downward sloping / vertical ]. This is due to _________________________.
3. Interest rate represents the _____________________ of holding money. The higher the interest
rate, the [ less / more ] money demanded as ________________________.
4. What are the factors that cause the shifts of money demand? In which direction?
5. Which of the following increases demand for money?
a) An increase in real GDP
b) An invention in alternative payment technology than cash
c) A decrease in price level
d) An decrease in interest rate
6. Money supply is [ downward sloping / upward sloping / vertical ] due to ________________.
7. As money supply increases, equilibrium interest rate [ rises / falls / remains constant ].
Federal Reserve, Monetary Policy, and Money Supply
8. Explain the definitions and differences of required reserve ratio, discount rate, interest on
reserves, and Fed funds rate.
9. Briefly explain why the change in checking account in the economy leads to the change in
money supply.
10. When interest rate is high, price of bonds is [ high / low ] and bond prices are [ high / low ].
11. The higher the interest rate,
- the [ less / more ] investment undertaken by firms due to ____________________________.
- Furthermore, the [ less / more ] consumption by households as _______________________.
- Thus, aggregate demand [ increases / decreases ].
12. If the Fed increases the required reserve ratio
- Banks can lend [ more / less ] of their reserves because ______________________________.
- Thus, checking account in the economy [ increases / decreases ].
- Money supply [ increases / decreases ].
- This is a/an [ expansionary / contractionary ] monetary policy.
- Interest rate [ increases / decreases ]. The AD curve is shifted [ leftward / rightward ].
13. If the Fed decreases discount rate
- Banks are likely to make [ more / less ] loans because _______________________________.
- This is [ an expansionary / a contractionary ] monetary policy.
- Interest rate [ increases / decreases ]; thus the AD curve shifts [ leftward / rightward ].
14. If the Fed pays lower interest on reserves
- Banks are likely to lend [ more / less ] of their reserves because _______________________.
- Thus, money supply [ increases / decreases ].
- This is [ an expansionary / a contractionary ] monetary policy.
- The AD curve is shifted [ leftward / rightward ].
15. If the Federal Reserve buys bonds from the banks
- Banks’ reserves would [ increase / decrease ].
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Business Learning Center – Econ 102 (Eudey) – Chapter 14 (Money and Interest Rate)
Tutor: Kanit Kuevibulvanich
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As a result, banks can lend [ more / less ], and money supply [ increases / decreases ].
This is [ an expansionary / a contractionary ] monetary policy.
This policy is also called open market [ sales / purchases ].
Short-term interest rate [ rises / falls ]. The AD curve is shifted [ leftward / rightward ].
Furthermore, bond price [ increases / decreases ] and stock prices [ rise / drop ].
Monetary Policy, Aggregate Demand, Exchange Rate, and Limits of Monetary Policy
16. If it takes 200 Japanese Yen to buy 1 US Dollar instead of 100 Japanese Yen
- Then the US Dollar is said to have [ appreciated / depreciated ].
- It now costs _______ Japanese Yen for a US good priced at 1 US Dollar. To the Japanese,
this good is now [ more expensive / cheaper ]. Therefore, US net exports [ rise / fall ].
- It can be concluded that, if US Dollar appreciates, US net exports [ rise / fall ].
- (Bonus) Furthermore, it can be said that Japanese Yen has [ appreciated / depreciated ].
17. If US interest rate is higher than other countries
- Then US asset is [ more / less ] attractive to foreign investors/savers.
- Demand for US Dollar [ rises / falls ] and US Dollar [ appreciates / depreciates ] because
it would take [ more / less ] foreign currencies to buy one US Dollar.
18. In the expansionary monetary policy via open market operations
- The Fed [ buys / sells ] Treasury securities to banks. Banks have [ less / more ] reserves
to lend. Money supply [ increases / decreases ].
- As a result, the short-term interest rate [ increases / decreases ]; therefore, consumption
and investment [ increases / decreases ].
- Also, net exports [ increases / decreases ] since the [ higher / lower ] interest rate leads to
the [ appreciation / depreciation ] of US Dollar because _____________________________.
- The AD curve is shifted [ left / right ].
19. To bring the economy out of a recession caused by a negative demand shock (say, loss of
consumers’ and investors’ confidence), the Fed should conduct a/an [ expansionary /
contractionary ] monetary policy to [ increase / decrease ] the aggregate demand.
20. In times of high inflation, the Fed should conduct a/an [ expansionary / contractionary ]
monetary policy.
21. True or False
- There is a crowding out effect in monetary policy.
- There is a crowding out effect in fiscal policy.
22. The Fed funds rate is a [ short-term / long-term ] interest rate. Explain how can the Fed
influence the long-term interest rate.
23. If the interest rate is near zero
- Then the expansionary monetary policy is [ more effective / less effective ].
- This is known as _______________________________. Explain.
- Which policy should be used to stimulate the economy instead?
24. During recession
- Lending becomes [ more / less ] risky; thus, banks make [ less /more ] loans.
- Therefore, the actual checking account deposit multiplier is [ smaller / larger ] than the
theoretical multiplier, which is given by ____________________.
- To stimulate the economy, the Fed [ buys / sells ] bonds from banks, which receive the
reserves from the Fed. Banks [ lend / do not lend ] these reserves. The actual increase in
money supply is [ small / large ]; thus, the monetary policy is [ effective / ineffective ].
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