KRUGMAN_WELLS_MACRO_CHAPTER14

But theres another reason the japanese hold so much

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Unformatted text preview: ly in the evening rather than stay open all night. But there’s another reason the Japanese hold so much cash: there’s little opportunity cost to doing so. Short-term interest rates in Japan have been below 1% since the mid-1990s. It also helps that the Japanese crime rate is quite low, so you are unlikely to have your wallet full of cash stolen. So why not hold cash? I >>>>>>>>>>>>>>>>>>>> Issei Kato/Reuters/Landov A Yen for Cash ®® ® ® ® >>CHECK YOUR UNDERSTANDING 14-1 1. Explain how each of the following would affect the real and nominal quantity of money demanded: a. Short-term interest rates rise to 30%. b. All prices fall by 10%. c. New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register. d. For some reason, firms return to the old practice of paying employees in cash rather than with checks. Solutions appear at back of book. ® ® QUICK REVIEW Money offers a lower rate of return than other financial assets. We usually compare the rate of return on money with short-term, not longterm, interest rates. Holding money provides liquidity but has an opportunity cost, leading to the downward slope of the money demand curve. Because the nominal demand for money is proportional to the aggregate price level, the money demand can also be represented by the real money demand curve. Changes in aggregate spending, institutions, and technology shift the real money demand curve. A widely used approach to money demand focuses on the velocity of money. 350 PA R T 5 S H O R T- R U N E C O N O M I C F L U C T U AT I O N S UNCORRECTED Preliminary Edition Money and Interest Rates “The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 23⁄4 percent.” So reads the first sentence of the press release from the FOMC after its meeting of March 22, 2005. (A basis point is equal to 0.01 percentage point. So the statement says that the Fed raised the target from 2.50% to 2.75%.) We learned about the federal funds rate in Chapter 13: it’s the rate at which banks lend reserves to each other to meet the required reserve ratio. As the statement implies, at each of its eight-times-a-year meetings, the Federal Open Market Committee sets a target value for the federal funds rate. It’s then up to Fed officials to achieve that target. This is done by the Open Market Desk at the Federal Reserve Bank of New York, which buys and sells Treasury bills to achieve that target. Other short-term interest rates, such as the rates on bank loans to businesses, move with the federal funds rate. So when the Fed raised its target for the federal funds rate from 2.50% to 2.75% in March 2005, all short-term interest rates rose as well by about a quarter of a percentage point. How does the Fed go about achieving a target federal funds rate? And more to the point, how is the Fed able to affect interest rates at all? The Equilibrium Interest Rate...
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