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Lecture_18_2010_M - Intermediate Macroeconomics Bruce...

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Unformatted text preview: Intermediate Macroeconomics Bruce Preston March 30, 2010 Today Short run odel Introduce onetary policy The Philips curve re introduced Short run Model IS curve: deter ines de and relative to potential for al posible interest rates i.e.: suply Monetary policy deter ines the specic interest rate observed in the econo y Which Interest Rate? The key instru ent of onetary policy is a short run interest rate Caled the Federal funds rate It is a no inal instru ent It is the rate charged on lending and borowing betwen banks on a daily arket The Trans ision Mechanis The Fed controls the no inal interest rate Econo ic decisions depend on the real interest rate. Recal i t = R t + t or R t = i t t Fisher equation The Trans ision Mechanis I More acurately i t = R t + e t The central banks ability to a ect real interest rates depends on properties of in ation expectations Sticky in ation asu ption: prices adjust slowly No inal and real interest rates ove together in short run Monetary policy has real e ects in the short run Recal the clasical dichoto y Output and In ation...
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