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Unformatted text preview: ultiplier effect,
because changes in the interest rate lead to changes in
consumer spending and savings as well as investment
spending. In the short run, a change in the equilibrium
interest rate determined in the money market results in a
change in real GDP and in savings through the multiplier
effect. This shifts the supply of loanable funds in the market for loanable funds until it reaches equilibrium at the
new equilibrium interest rate.
6. In the long run, changes in the money supply affect the
aggregate price level but not real GDP or the interest rate.
In fact, there is monetary neutrality: changes in the
money supply have no real effect on the economy. So
monetary policy is ineffectual in the long run.
7. In the long run, the equilibrium interest rate matches the
supply and demand for loanable funds that arise at potential output in the market for loanable funds. KEY TERMS
Short-term interest rates, p. 000
Long-term interest rates, p. 000
Money demand curve, p. 000
Real quantity of money, p. 000
Real money demand curve, p. 000 Velocity of money, p. 000
Quantity equation, p. 000
Liquidity preference model, p. 000 Expansionary monetary policy, p. 000
Contractionary monetary policy, p. 000
Monetary neutrality, p. 000 Money supply curve, p. 000
Target federal funds rate, p. 000 PROBLEMS
1. Go to the FOMC page of the Federal Reserve Board’s website
(http://www.federalreserve.gov/FOMC/) to find the statement issued after the most recent FOMC meeting. (Hint: go
to the bottom of the web page and click on the most recent
statement listed in the calendar.) a. What is the target federal funds rate?
b. Is the target federal funds rate different from the target
federal funds rate from the previous FOMC statement? If
yes, by how much does it differ? c. Does the statement comment on macroeconomic conditions in the United States? How does it describe the U.S.
2. How will the following events affect the nominal demand for
money (as defined by M1)? In each case, specify whether there is a shift of the demand curve or a movement along the
demand curve and its direction. a. There is a decrease in the interest rate from 12% to 10%.
b. Thanksgiving arrives and, with it, the beginning of the holiday shopping season. c. McDonald’s and other fast-food restaurants begin to accept credit cards. d. The Fed engages in an open-market purchase of U.S. Treasury bills.
3. The accompanying table shows nominal GDP, M1, and M2 in
billions of dollars in five-year increments from 1960 to 2000
as published in the 2005 Economic Report of the President.
Complete the table by calculating the velocity of money using
both M1 and M2. What trends or patterns in the velocity of
money do you see? What might account for these trends? 366 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 Year GDP
M2 1960 $526.4 $140.7 $312.4 ? ? 1965 719.1 167.8 459.2 ? ? 1970 1,038.5 214.4...
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This note was uploaded on 09/09/2009 for the course ECON 701 taught by Professor Charlie during the Spring '09 term at École Normale Supérieure.
- Spring '09
- Monetary Policy