This shifts the supply of loanable funds in the

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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 ( 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. economy? 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 (billions of dollars) M1 (billions of dollars) M2 (billions of dollars) Velocity using M1 Velocity using 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.

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