Mod 31_ Monetary Policy and the Interest Rate.docx - Justin Sousa 1 Mod 31 Monetary Policy and the Interest Rate Monetary Policy and the Interest Rate

Mod 31_ Monetary Policy and the Interest Rate.docx - Justin...

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Justin Sousa 1 November 29, 2016 Mod 31: Monetary Policy and the Interest Rate Monetary Policy and the Interest Rate - An increase in the money supply from M 1 to M 2 shifts the money supply curve to the right and causes a decrease in the equilibrium interest rate from r 1 to r 2 - The Federal Open Market Committee decides on the interest rate to prevail for the next six weeks, or its next meeting - The Federal Reserve can move the interest rate through open-market operations that shift the money supply curve - In practice, the Fed sets a target federal funds rate and uses open-market operations to achieve that target - This target federal funds rate is enforced by the Open Market Desk of the Federal Reserve Bank of New York, which adjusts money supply through open market operations - The usage of other monetary policy tools, such as the discount window and changes in reserve requirements, are not used regularly - An increase in Money Supply causes a decrease in the Interest Rate; a decrease in the money supply causes an increase in the Interest Rate Monetary Policy and Aggregate Demand - Money Supply Expands→Lower Interest Rate→More Investment Spending→Higher Real GDP→Higher Consumer Spending→and so on through the multiplier process - Expansionary Monetary Policy is monetary policy that increases the aggregate demand - Contractionary Monetary Policy is monetary policy that decreases the aggregate demand
Justin Sousa 2 November 29, 2016 Monetary Policy in Practice -

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