Banking and Monetary Policy

TOPIC III: Demand, Supply and the Money Market

OBJECTIVES: 
  1. define and explain liquidity preference function
  2. list and analyze the tools of the Federal Reserve in conducting monetary policy.
  3. define and explain the reasons for holding money and recognize the main determinant of each.
  4. explain what happens to the price of a bond when the interest rate changes.
  5. analyze how the change in money supply affects: interest rates, investment spending, national income and employment in the Keynesian model.
  6. analyze how change in money supply functions in the aggregate supply/aggregate demand model.

KNOW THE FOLLOWING TERMS

equation of exchange 

expected rate of return 

monetarism

quantity theory of money 

velocity

transactions demand 

precautionary demand

KEY CONCEPTUAL QUESTIONS

  1. What is monetary policy and what are the tools of the FED?
  2. What is the demand for money curve and how is it related to the interest rate?
  3. How do the supply and demand for money determine the interest rate?