Fed will lower the legal reserve ratio an increase in

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Unformatted text preview: k excess reserves, and banks can make more loans. • FED will lower the legal reserve ratio An increase in the money supply will lower the interest rate, causing Investment to increase and equilibrium GDP to rise. 74 • FED will lower the discount rate charged to member banks The amount of the change will be dependent on the size of the Income Multiplier (1/MPS) Sm 1 Sm 2 Easy Money Policy—FED % of I n i% 1 t 2 e i% r e s t When the FED engages in easy money policy, the supply of money moves to the right and the interest rate falls. This simulates investment and interest-sensitive consumption, which increases the aggregate demand. Price levels rise while real output increases. Dm Q1 Q2 $ of M The Money Market Tight Money policy: Contractionary Restriction of credit, higher costs Goal: Actions: Results: Decrease the money supply • FED will sell • FED will raise the legal government bonds reserve ratio from banks and the public Decrease the bank √ A decrease in the excess reserves, and money supply will raise banks will refrain the interest rate, causing from making new investment to decrease, loans as old loans are with the resulting lower repaid. aggregate demand restraining demand-pull inflation Sm 3 % of i%3 I n i% 1 t e r e s t • FED will raise the discount rate charged to member banks The amount of the change will be dependent on the size of the Income Multiplier (1/MPS) Sm 1 Tight Money Policy—FED When the FED engages in tight money policy, the supply o...
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This note was uploaded on 02/03/2014 for the course ECON Foreign Ec taught by Professor Mates during the Fall '11 term at Indianapolis Metropolitan High Sch.

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