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ECN 211 L16 Monetary Policy_BB

ECN 211 L16 Monetary Policy_BB - ECN 211 Macroeconomic...

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05/06/09 1 ECN 211 Macroeconomic Principles L16:  Monetary Policy
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05/06/09 2 The Money Supply Obviously banks influence the total amount of money in the economy – the Money Supply A country’s central bank attempts to control Money Supply Growth In the US it is the Federal Reserve System or the Fed
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05/06/09 3 Fed’s Main Functions Control the money supply and direct monetary policy (Federal Open Market Committee) Most important function. Banker for the Federal Gov’t Authorized to sell government securities for the U.S. Treasury. Banker’s Bank– accepts deposits from and makes loans to commercial banks.
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05/06/09 4 Controlling the Money Supply To control the money supply, the Fed needs to define it The money supply is measured in various ways depending upon how widely money is defined M1 is the narrowest measure of money supply Includes the most liquid forms of money Typically there is M1, M2, M3 M1<M3
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5 The Equation of Exchange Simply: = Expenditure ($) = nominal GDP = money supply = velocity of circulation = price level =real GDP ______________________ : the average number of times each dollar is spent on final goods and services.
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Linking Money supply to Nominal GDP. If V is stable M1 has become unstable recently.
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