chap 17 - 11/15/2010 Chapter 17 The Central Bank, Money...

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11/15/2010 1 Chapter 17 The Central Bank, Money Creation and Monetary Policy What is money? ` 1)Medium of exchange ` 2)Store of value ` 3)Unit of account ` Liquidity = ease of converting an asset to cash ` M1 = cash + coin + demand deposits ` M2 = M1 + savings + “small” time deposits
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11/15/2010 2 The Federal Reserve (“The Fed”) ` Goals of the Federal Reserve ` 1)low inflation* 1)low inflation ` 2)economic growth ` 3)low unemployment ` 4)steady interest rates & exchange rates Organization of the Federal Reserve ` 7 member “Board of governors” ` 1 chair = Ben Bernanke 1 chair Ben Bernanke ` 12 regional banks ` monetary policy = changes in rate of growth of money suppl growth of money supply
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11/15/2010 3 “Loose” or “expansionary” monetary policy ` Increasing the growth rate of the money supply reduces interest rates i i* S S’ Q* D Q loanable funds “Tight” or “contractionary” monetary policy ` Decreasing the growth rate of the money supply increases interest rates S2 S1 i' i i* Q* D Q loanable funds Q’
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11/15/2010 4 Monetary policy `
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chap 17 - 11/15/2010 Chapter 17 The Central Bank, Money...

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