ec-8 - Chapter 14: Monetary Policy After this chapter you...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 14: Monetary Policy After this chapter you should be able to do the following. Define monetary policy and describe the Federal Reserve’s monetary policy goals. Describe the Federal Reserve’s monetary policy targets, and explain how expansionary and contractionary monetary policies affect the interest rate. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Use aggregate demand and aggregate supply graphs to show the effects of monetary policy on real GDP and the price level. Discuss the Fed’s setting of monetary policy targets and assess the arguments for and against the independence of the Federal Reserve. 2
Background image of page 2
Monetary policy is the actions the Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives. The Fed’s objectives have changed over the years. The Federal Reserve System’s chief objective when it was first established was to ensure the stability of the banking system by acting as a lender of last resort. By the 1950s its goal was to keep interest rates low and stable. The Federal Reserve Act of 1978 charged the Fed with achieving both a low, stable inflation rate and full employment. 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Objectives of Monetary Policy Low, stable inflation (this is what they concentrate on) Full employment implying no cyclical unemployment Natural rate of unemployment is the rate where there is no cyclical unemployment. Other objectives Economic Growth Stability of Financial markets and institutions 4
Background image of page 4
Let’s look at price stability We will need to develop an aggregate money market to show how the Fed can effect price stability. 14 - 1 The Inflation Rate, 1952-2004 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The Aggregate Money Market A person’s wealth can be held as stocks, bonds which earn a return, or as money (currency or checking account), which earns no return (or very little in the case of interest paying checking accounts). For simplicity we will assume a person holds either money or bonds. The opportunity cost of holding money is the forgone return measured by the interest rate you could have received is you held bonds. 6
Background image of page 6
Determines of how much cash an individual will decide to hold Interest rates : Rising interest rates lead the public to decrease its quantity of money demanded. Changes results in movements on the Money demand curve. Real income : Rising real income will lead to a desire to hold more money. Changes results in shifts of the Money demand curve. The price level : Rising price level will lead to a desire to hold more money. Changes results in shifts of the Money demand curve. 7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
To perform transactions quickly and easily Liquidity demand for money is the demand for money that represents the needs or desires off individuals or firms to make purchases on short notice without incurring excessive costs. Speculation
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 31

ec-8 - Chapter 14: Monetary Policy After this chapter you...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online