Use of the multiplier to calculate total change in

34. Use of the multiplier to calculate total change in checking account deposits
a. $1,000 deposited at BOA
b. $1,000 x (1/0.1) = $10,000
c. with rr = 0.10 the increase in M1 is 10 times the initial increase in reserves ($1,000)
i. Note: Real world deposit multiplier = 1.6
35. Monetary Policy: involves actions the Fed takes to manage the money supply and
interest rates and to ensure the flow of funds from lenders to borrowers. The Fed
takes these actions to achieve macroeconomic policy objectives like high
employment, price stability, high rates of economic growth, and the stability of
the financial system (they can lower interest rates which increase consumption
and investment spending which shifts AD to the right) (Federal Reserve:
∆interest rates)
36. In recession versus inflationary situation
a.
37. The Federal Reserve was created in year 1913 by Congress
a. independent from prez and Congress
i. doesn’t have to go to Congress for funding
38. Monetary policy is one of the major responsibilities of the Fed
39. The FOMC– Federal Open Market Committee

40. The goals of monetary policy
41. Monetary policy affects the U.S. economy through Open Market Operations which affect _____
42. The money market; money demand (M d ) and money supply (M s )
a. define M
d
--people hold money because …
i. negatively related to i, as i rises M d falls
ii. represents the transactions demand for money
iii. M d = f (Y, P)
1. ∆Y > 0 increase the demand for money for transactions
2. ∆P > 0 increase M1 required to pay for transaction
b. the opportunity cost of holding money (M1)
c. M s is controlled by the Federal Reserve; it is vertical
i. OMP shifts M s to the right
ii. OMS shifts M s to the left
43. OMO in the case of recession; impact on Loanable Funds market, money market and the economy