201C15ol - -raise reserve requirement-raise the discount...

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CHAPTER 15 - MONETARY POLICY -What is the relationship between the money supply and AD? -How can the Fed use its control of the money supply and to alter macro outcomes? -How effective is monetary policy vs. fiscal policy? -Monetary policy: the use of money and credit controls to influence the economy -The price of holding money (cash) is the interest that could have been earned -Three major demands for money: -transactions demand--money held for making everyday purchases (pizza, burgers, beer) -precautionary demand--unexpected emergencies (run out of gas) -speculative demand--future attractive financial opportunities (low priced hot stock) -Money-Market Equilibrium (T-84): the intersection of the money-demand and money-supply curves (E1) establishes the equilibrium rate of interest -Changing the Rate of Interest, Figure 15.2, p. 291: if the money supply increases/decreases the equilibrium rate will change -what would cause the money supply to decrease?
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Unformatted text preview: -raise reserve requirement-raise the discount rate-sell bonds-Interest Rates and Spending (T-85):-The Fed can stimulate the economy in three distinct steps:-increase the money supply-reduce the interest rate-increase AD-The opposite would occur with a tight money policy-Liquidity Trap (T-86): Shows the possibility that interest rates may not respond to changes in the money supply (really low rates of interest)-The equation of exchange: MV = PQ-could also be stated as M = PQ / V V = PQ / M MV / Q = P M = money supply V = velocity (# of times the $ is spent) P = average price of goods Q = quantity of goods sold in a period-Natural rate of unemployment: the long-term rate of unemployment determined by structural forces in labor and product markets-Real interest rate = nominal interest rate - anticipated inflation-Bottom line: our success is determined by our macroeconomic performance...
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201C15ol - -raise reserve requirement-raise the discount...

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