Chapter 14

Chapter 14 - Chapter 14: Monetary Policy By driving down...

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Chapter 14: Monetary Policy By driving down interest rates, the Fed succeeded in heading off what some economists had predicted would be a prolonged and severe recession What is Monetary Policy? The actions the federal reserve takes to manage the money supply and interest rates to pursue its economic objectives The goals of Monetary Policy The fed has set four monetary policy goals that are intended to promote a well- functioning economy: o Price stability Control inflation o High employment o Economic growth o Stability of financial markets and institutions The most important goals are price stability and high employment The Money Market and the Fed’s Choice of Targets Monetary Policy Targets The Demand for Money o A decrease in the interest rate… causes an increase in the quantity of money demanded o The opportunity of holding money is buying treasury bills But there is always an interest rate So the lower the interest rate, the higher the demand The relationship is between nominal short term interest rate and the quantity of money Shifts in the Money Demand Curve o A decrease in Real GDP or a decrease in the price level will shift the money demand to the left o An increase in real GDP or an increase in the price level will shift money demanded to the right How the Fed Manages the Money Supply: A quick Review Equilibrium in the Money Market Talking about equilibrium in the short term When the fed increases the money supply from MS1 to MS2…the equilibrium interest rate falls MS1 and MS2 are vertical lines because the fed controls it and it is not affected by the market When the Fed decreases the money supply from MS1 to MS2…the equilibrium interest rate rises When the Fed increases the money supply, the short term interest rate must fall until it reaches a level at which house-hlds and firms are willing to hold the additional money Learning Objective
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Chapter 14 - Chapter 14: Monetary Policy By driving down...

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