Chapter 31 - Monetary Policy

Chapter 31 - Monetary Policy - M ON ET ARY POL I CY CH APT...

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Unformatted text preview: M ON ET ARY POL I CY CH APT E R 31 Federal Reserve System - Fed The Fed: Adjusts the quantity of money in circulation. Sets the federal funds rate: the interest rate banks charge each other on overnight loans of reserves. Federal Reserve System Fed’s Policy Tools Three monetary policy tools Required reserve ratios Discount rate – interest rate at which Fed lends to depository institutions. Open market operations – purchase and sales of U.S. treasury bonds and bills. Monetary expansion Increase money supply – via open market operations Decrease interest rates: discount rate, federal funds rate Decrease reserve ratio All of these have the effect of expanding demand. That is, AD shifts to the RIGHT Monetary contraction Decrease money supply – via open market operations Increase interest rates: discount rate, federal funds rate Increase reserve ratio All of these have the effect of contracting demand. That is, AD shifts to the LEFT Examples of the Fed in Action Paul Volcker’s Fed In the early 1980s the Fed slowed the growth rate of money and interest rates rose dramatically. Real GDP decreased in a recession and the inflation rate slowed. Examples of the Fed in Action Alan Greenspan’s Fed In 1988 the Fed again slowed the growth rate of money and interest rates again rose. A recession occurred in 1990. In 1991 the Fed increased the growth rate of money and interest rates fell. In 1994 the Fed nudged interest rates higher and then lower during 1996. In the first part of 1997, the Fed pushed interest rates slightly higher but then became concerned about the global slowdown in economic growth, so until the end of 1998 the Fed cut interest rates. ...
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This note was uploaded on 09/12/2011 for the course ECON 2100 taught by Professor Klimenko during the Fall '08 term at Georgia Institute of Technology.

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Chapter 31 - Monetary Policy - M ON ET ARY POL I CY CH APT...

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