supervision Supplies currency Holds reserves Clears checks Makes loans to banks

Supervision supplies currency holds reserves clears

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supervision Supplies currency Holds reserves Clears checks Makes loans to banks (discount loans) Controls the money supply
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Implementing monetary policy Policy goals: economic growth, low unemployment, and price stability Intermediate targets – objectives that are used to help achieve policy goals (examples: money supply or interest rate targets)
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Equation of Exchange MV = PY M = quantity of money P = price index Y = real GDP V = # of times a typical dollar is used to purchase GDP = PY / M Quantity theory of money V is constant (and Y is constant in the long run) Changes in M result in changes in proportionate changes in nominal GDP (and only in the price level in the long run)
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Tools of monetary policy Reserve requirement Discount rate (also affects the federal funds rate) Discount rate – interest rate charged by Fed on loans of reserves to banks Federal funds rate = interest rate charged by banks on loans of reserves to other banks Open market operations – buying or selling government bonds (most commonly used tool of monetary policy)
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Monetary policy To expand the money supply, the Fed may: Lower the reserve requirement ratio Lower the discount rate Buy government securities
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Foreign Exchange Market intervention Buying or selling currencies to maintain target exchange rate Shown on board Sterilization – open market operations to offset the domestic money supply effect of foreign exchange market intervention
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Money demand Reasons for holding money: Transactions demand Precautionary demand Speculative demand Quantity of money demanded: Rises as nominal income rises (a higher price level or higher real GDP results in an increase in demand) Declines as the interest rate rises
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Money demand
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Money demand and income
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Money Supply
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Equilibrium
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Monetary transmission mechanism: Keynesian model
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Monetary transmission mechanism (cont.)
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Monetary transmission mechanism (cont.)
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