11.12.08 - ECONOMICS 1 Professor Kenneth Train Lecture 22...

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ECONOMICS 1 Professor Kenneth Train 11/22/08 Lecture 22 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Well, hello everybody! That was an exciting Monday, wasn’t it? Okay, it makes more sense to study monetary theory in tandem with fiscal policy. So I’ll finish up Monday’s lecture and then show how they interact with each other. We ended up with an equilibrium interest rate: The demand curve, “demand for money” (Md,) might sound abstract. It just means that some people want to borrow and some want to lend. Equilibrium occurs when the amount borrowed equals the amount lent. How Interest Rate (r) Changes Shifts in Demand for Money We’re interested in how the r changes. One thing that changes it is money demand: Rising prices also raise the interest rate. This link— that r rises with income and price—provides the link between monetary and fiscal policy. Shifts in Money Supply The other thing that can affect it is the supply of money. If there’s a greater supply of money, it’s easier for people to borrow. There’s a pressure for r to move down and it will. You should be asking yourself, “I can understand how demand for money changes, but how does the supply of money change?” It changes through intervention by the Federal Reserve Board. So now we’ll look at how government can change its supply of money. How does Money Supply Change?
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/22/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 Monetary Policy & The Fed We know that monetary policy is policy with the purpose of changing r. This is done through the central bank, the Fed. This bank is the “banks’ bank,” the place where banks put their money. It has a board of directors and committees who meet to affect the supply of money. Increasing the Money Supply How does it affect the supply? There are three ways. - Lower the required reserve ratio - Lower the discount rate - Purchase government securities 1. Lower the required reserve ratio First, you can lower the required reserve ratio . What is this? It’s the portion of deposits the bank has to hold in the Fed. Say it’s 20%, the bank has to put 20% of its money in the Fed and can loan the rest out. How does the required reserve ratio increase the
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at Berkeley.

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11.12.08 - ECONOMICS 1 Professor Kenneth Train Lecture 22...

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