Lecture+16 - 1 Economics 102 Lecture 16 : Monetary Policy...

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Unformatted text preview: 1 Economics 102 Lecture 16 : Monetary Policy LECTURE 16 MONETARY POLICY 1 Monetary Policy Why is the chairman of the Board of Governors sometimes called the second most powerful person in the world? Why to markets react strongly to comments by Ben Bernanke? ? LECTURE 16 MONETARY POLICY 2 In this lecture, look for the answers to these questions: How does the interest-rate effect help explain the slope of the aggregate- demand curve? How does monetary policy operate? How can the central bank use monetary policy to shift the AD curve? 2 LECTURE 16 MONETARY POLICY 3 Introduction Earlier lectures covered: the long-run effects of fiscal policy on the long-run effects of monetary policy on This lecture focuses on the short-run effects of monetary policy, the next on the short-run effects of fiscal policy. Both kinds of policy work through aggregate demand. LECTURE 16 MONETARY POLICY 4 LRAS Y N A Role For Policy? Consider a decline in aggregate demand; perhaps caused by a stock market crash. Can monetary or fiscal policy be used to reverse the effect on AD and eliminate the recession? P Y AD 1 SRAS 1 P 1 A LECTURE 16 MONETARY POLICY 5 A Role For Policy? First, we develop a deeper understanding of why the AD curve is negatively sloped through the interest-rate effect. Then we discuss how monetary policy affects the position of the AD curve. 3 LECTURE 16 MONETARY POLICY 6 Aggregate Demand Recall, the AD curve slopes downward for three reasons: the wealth effect the interest-rate effect the exchange-rate effect Next: a supply-demand model that helps explain the interest-rate effect and how monetary policy affects aggregate demand. the most important of these effects for the U.S. economy LECTURE 16 MONETARY POLICY 7 The Theory of Liquidity Preference A simple theory of the interest rate (denoted r ) r adjusts to balance Money supply: LECTURE 16 MONETARY POLICY 8 Money Supply MS curve is vertical : Changes in r do not affect MS , which is fixed by the Fed. M Interest rate (r) MS Quantity fixed by the Fed 4 LECTURE 16 MONETARY POLICY 9 The Theory of Liquidity Preference Money demand reflects how much wealth people want to hold in liquid form....
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

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Lecture+16 - 1 Economics 102 Lecture 16 : Monetary Policy...

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