econ_100B-17 - ECONOMICS 100B Professor Steven Wood...

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ECONOMICS 100B Professor Steven Wood 10/23/08 Lecture 17 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. *Note: Reference to Professor Wood’s Power Point Slides today will be noted as (17-1), for “Power Point #17: Monetary Policy and the Federal Reserve System Part 2, Slide #1.” LECTURE Good afternoon everyone. I want to remind you that we have an exam in two weeks. Our second exam has been moved from November 4 th to November 6 th . The exam will have the same format as the first exam. This will cover the IS-LM model. It has nothing to do with aggregate demand or supply model. It’s just the IS-LM model we have done in class (Ch. 7, 8, and 9). It’ll also cover monetary policy and fiscal policy (which we’ll do next week). Again, I know that Ch.9 especially has a lot of stuff on how the IS-LM is related to aggregate and supply model, but you don’t have to worry about this for this exam. You will be tested on it on the next exam. Please note that the old exams may have covered different topics. So today we want to continue with our discussion on monetary policy. These have more to do with the actual implementation of the monetary policy. We’ll talk first about monetary policy control, and then rules versus discretion. When we think about monetary policy control, we need to know that they don’t have control of any variables directly. So when they implement monetary policy, they actually want to use some other variables to give them a guide of how this policy is actually unfolding. So these things called intermediate targets are variables that exist between monetary goals and its tools. This would give the Fed some direction of how they’re doing. Some of these include monetary aggregates such as M1 and M2, and short-term interest rates, such as the Fed funds rate. We’ve already talked about the fact that the Fed cannot target the money supply directly. They can control either the money supply or the interest rates, but they can’t do both at the same time. If they control money supply, then interest rates will bounce around depending on what’s happening. Those things will determine what interest rates will be. Alternatively, if they control interest rates, then they’ve got to let the money supply be what it will be. This will depend on money demand and IS shocks. Right now the Fed is targeting an interest rate. We talked a little bit last time about interest rate
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This note was uploaded on 11/15/2008 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.

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econ_100B-17 - ECONOMICS 100B Professor Steven Wood...

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