Chapter 14

Chapter 14 - Interest Rates and Monetary Policy CHAPTER...

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Interest Rates and Monetary Policy CHAPTER FOURTEEN MONETARY POLICY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Identify the goals of monetary policy. 2. Identify two types of demand for money and the main determinant of each. 3. Describe the relationship between GDP and the interest rate and each type of money demand. 4. Explain what is meant by equilibrium in the money market and the equilibrium rate of interest. 5. Explain the relationship between bond prices and the money market 6. List the principal assets and liabilities of the Federal Reserve Banks. 7. Explain how each of the three tools of monetary policy may be used by the Fed to expand and to contract the money supply. 8. Explain the relative importance of the monetary policy tools. 9. Describe how the Fed targets the Federal funds rate as part of its monetary policy actions. 10. Describe expansionary and restrictive monetary policies, and explain why and how they are used. 11. Explain the Taylor rule and describe how it relates to current Fed policy. 12. Explain the cause-effect chain between monetary policy and changes in equilibrium GDP. 13. Demonstrate graphically the money market and how a change in the money supply will affect the interest rate. 14. Show the effects of interest rate changes on investment spending. 15. Describe the impact of changes in investment on aggregate demand and equilibrium GDP. 16. Contrast the effects of an expansionary monetary policy with the effects of a restrictive monetary policy. 17. List two strengths and three shortcomings of monetary policy. 18. Describe the arguments for and against “inflation targeting” versus a more discretionary “artful management” approach to monetary policy. 19. Summarize the connections between AD-AS, the price level, real output, and stabilization (fiscal and monetary) policy. 20. Define and identify terms and concepts at the end of the chapter. 204
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Interest Rates and Monetary Policy CHAPTER 14 LECTURE NOTES I. Introduction to Monetary Policy A. Learning objectives – In this chapter students will learn: 1. How the equilibrium interest rate is determined in the market for money. 2. The goals and tools of monetary policy. 3. About the Federal funds rate and how the Fed controls it. 4. The mechanisms by which monetary policy affects GDP and the price level. 5. The effectiveness of monetary policy and its shortcomings. B. Reemphasize Chapter 12’s points: The Fed’s Board of Governors formulates policy, and twelve Federal Reserve Banks implement policy. C. The fundamental objective of monetary policy is to aid the economy in achieving full-employment output with stable prices. 1. To do this, the Fed changes the nation’s money supply. 2.
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This note was uploaded on 09/10/2009 for the course ECO 2251 taught by Professor Kirkland during the Spring '09 term at Troy.

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Chapter 14 - Interest Rates and Monetary Policy CHAPTER...

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