chapter 24 central bank and monetary policy

chapter 24 central bank and monetary policy - CHAPTER 24...

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Unformatted text preview: CHAPTER 24 Central Banks and Monetary Policy Chapter Twenty-Four 2 of 35 Lecture Outline 1. The demand for money a. Motives for holding money b. Factors that affect the demand for money 2. How central banks can change the money supply a. open market operations b. changing reserve requirements c. changing the discount rate 3. How interest rates are determined: bringing together money demand and money supply 4. The relationship between bond prices and interest rates 5. Impact of interest rates on investment, consumption and output 6. How monetary policy affects international trade 7. Limitations of monetary policy FYR Chapter Twenty-Four 3 of 35 The Demand for Money Wealth : portfolio allocation decision- cash- checking accounts- stocks- bonds- houses- money Chapter Twenty-Four 4 of 35 The Demand for Money How much money to hold (demand for money) is determined by the cost-benefit principle . Benefit of holding money used to make transactions Cost of holding money; the opportunity cost of foregone interest vs. Chapter Twenty-Four 5 of 35 The Money Demand Curve As interest rates increase, the opportunity cost of holding money increases and the public will demand less money. Money Interest rate M d M 1 r 1 r 2 M 2 Macroeconomic Factors that Affect the Demand for Money Cost of holding money The nominal interest rate ( i ) Benefits of holding money Real income or output ( Y ) The price level ( P ) Technological change Chapter Twenty-Four 6 of 35 Chapter Twenty-Four 7 of 35 The Price Level Affects Money Demand As prices increase, the demand for money shifts to the right. Money Interest rate M d 1 M d 2 As prices increase r 1 M 1 M 2 Chapter Twenty-Four 8 of 35 GDP Affects Money Demand As real GDP increases, the demand for money shifts to the right. Money Interest rate M d 1 M d 2 As real GDP increases r 1 M 1 M 2 The Central Bank Conducts monetary policy: controls the supply of money in a country Holds reserves from banks and other depository institutions and regulates banks Chapter Twenty-Four 9 of 35 Chapter Twenty-Four 10 of 35 Lender of last resort A central bank is the lender of last resort, the last place, all others having failed, from which banks in emergency situations can obtain loans. Chapter Twenty-Four 11 of 35 Open Market Operations and the Money Supply The central bank can change the total amount of reserves in the banking system through either of the following open market operations: In open market purchases , the central bank buys government bonds from the private sector. In open market sales , the central bank sells government bonds to the private sector. Chapter Twenty-Four 12 of 35 Increasing the Money Supply The central bank purchases government bonds from the public....
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This note was uploaded on 02/12/2012 for the course ECON EC1101 taught by Professor Ms during the Spring '08 term at National University of Singapore.

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chapter 24 central bank and monetary policy - CHAPTER 24...

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