ECON 202 Chapter Notes - Chapter 21: Nominal Interest Rate, Real Interest Rate, Open Market Operation
Document Summary
Higher real wealth stimulates consumer spending and thus increases the quantity of goods and services demanded: 2. ) interest-rate effect: a lower price level reduces the amount of money people want to hold. As people try to lend out their excess money holdings, the interest rate falls. The lower interest rate stimulates investment spending and thus increases the quantity of goods and services demand most important: 3. ) Exchange-rate effect: when a lower price level reduces the interest rate, investors move some of their funds overseas in search of higher returns. In r1, the interest rate is above the equilibrium level and people will want to hold less money than the quantity of money that the. Fed has supplied people will try to get rid of it by buying interest-bearing bonds or deposit it into interest-bearing bank accounts: banks will lower their interest rate so they will pay the people back less. Increase the price level from p1 to p2 .