summary_slideshow_nov30

summary_slideshow_nov30 - falls • Expectations can be...

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When the FOMC lowers its target federal funds rate FOMC orders regional Federal Reserve Banks to use their cash holdings to buy securities (U.S. government bonds) on the secondary bond market When the sellers of the bonds deposit their checks, the money supply increases The total increase in the money supply depends on the reserve ratio (money- multiplier)
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When risk rises Lenders refuse to make loans without higher compensation for the risk M2-growth falls as the money-multiplier falls (bank reserve ratios rise) Loans are difficult to get and their price (r) rises (leftward shift of M-Supply in money- market graph) I falls as firms can’t afford to borrow, AD
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Unformatted text preview: falls • Expectations can be self-fulfilling (we saw Constraints on current US/EU policy • Fiscal policy options limited by high borrowing costs (risk high so r is high) and the impact that will have on debt/GDP ratios that are already unsustainably high • Monetary policy options are limited as overnight inter-bank lending rates, which are controlled by policy, are already as low as policy-makers can get them (nearly zero) Things to notice: (1) The federal funds rate seems to fall late into each recession (inside lags are evident, economy may be recovering on its own) (2) The Fed’s exhausted its ability to use OMO’s right now...
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This note was uploaded on 02/02/2012 for the course ECON 102 taught by Professor Drozd during the Fall '08 term at University of Wisconsin.

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summary_slideshow_nov30 - falls • Expectations can be...

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