Goals of Monetary Policy

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

15

CHAPTER

Monetary Policy and the International Economy Key Terms

Monetary Policy

FEDERAL RESERVE BANK OF THE U.S.

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GOALS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Monetary Policy and the International Economy Key Terms

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to assist the economy in achieving a fullemployment,

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CONSOLIDATED BALANCE SHEET OF THE FEDERAL RESERVE BANKS

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

ASSETS

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Securities Loans to Commercial Banks

Monetary Policy and the International Economy Key Terms

LIABILITIES
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Reserves of Commercial Banks Treasury Deposits Federal Reserve Notes

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TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

Open-Market Operations Buying Securities

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action

From commercial bank

Bank gives up securities FED pays bank Banks have increased reserves

Problems and Complications

Monetary Policy and the International Economy Key Terms

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Public gives up securities Public deposits check in bank Banks have increased reserves
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From the public...

TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

Open-Market Operations Selling Securities

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action

To commercial banks.
FED gives up securities Bank pays for securities Banks have decreased reserves

Problems and Complications

Monetary Policy and the International Economy Key Terms

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FED gives up securities Public pays by check from bank Banks have decreased reserves
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To the public...

Goals of Monetary Policy

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

FEDERAL RESERVE PURCHASE OF BONDS

New reserves
$800 Excess Reserves

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Purchase of a $1000 bond from a bank...

$200 Required reserves

Monetary Policy and the International Economy Key Terms

$4000 Bank System Lending

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$1000 Initial Deposit

Total Increase in Money Supply ($5000)

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TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Open-Market Operations
Raising the Reserve Ratio Banks must hold more reserves Banks decrease lending Money supply decreases Lowering the Reserve Ratio Banks may hold less reserves Banks increase lending Money supply increases

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

The Reserve Ratio

Monetary Policy and the International Economy Key Terms

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TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Open-Market Operations

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

The Reserve Ratio

Monetary Policy and the International Economy Key Terms

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The Discount Rate Easy Money Policy Buy Securities Decrease Reserve Ratio Lower Discount Rate

Copyright McGraw-Hill/Irwin, 2005

TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Open-Market Operations

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

The Reserve Ratio

Monetary Policy and the International Economy Key Terms

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The Discount Rate Easy Money Policy Tight Money Policy Sell Securities Increase Reserve Ratio Raise Discount Rate

Copyright McGraw-Hill/Irwin, 2005

TOOLS OF MONETARY POLICY

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Open-Market Operations

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

The Reserve Ratio

Monetary Policy and the International Economy Key Terms

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The Discount Rate Discuss relative Easy Money Policy importance Tight Money Policy of each control Sell Securities Increase Reserve Ratio Raise Discount Rate

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Goals of Monetary Policy

MONETARY POLICY, REAL GDP, AND THE PRICE LEVEL

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Cause-Effect Chain

Monetary Policy and the International Economy Key Terms

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Money supply impacts interest rates Interest rates affect investment Investment is a component of AD Equilibrium GDP is changed

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MONETARY POLICY AND EQUILIBRIUM GDP

Sm1 Sm2 Sm3
Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Real rate of interest, i

10

10 8 6 0

Investment Demand

Federal Reserve Purchase of Bonds

8 Monetary Policy, Real GDP, and the Price Level

Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

6 0

Monetary Policy and the International Economy Key Terms

Dm
AS

Quantity of money demanded and supplied

Amount of investment, i

P3 P2 P1
AD3(I=$25) AD2(I=$20) AD1(I=$15)
Real domestic output, GDP

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If the Money Supply Increases to Stimulate the Economy Interest Rate Decreases Investment Increases AD & GDP Increases with slight inflation Increasing money supply continues the growth but, watch Price Level.

Price level

MONETARY POLICY AND EQUILIBRIUM GDP

Goals of Monetary Policy

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Money Market
Investment Equilibrium GDP Effects of an easy money policy Effects of a tight money policy

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Monetary Policy and the International Economy Key Terms

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MONETARY POLICY IN ACTION

Goals of Monetary Policy

Strengths of monetary policy

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Monetary Policy and the International Economy Key Terms

Speed and flexibility Isolation from political pressure

Focus on the Federal Funds Rate

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The Federal Funds Rate The Prime Interest Rate Recent Monetary Policy
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Problems and Complications

Goals of Monetary Policy Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds

Lags

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Changes in Velocity Cyclical Asymmetry Artful Management or Inflation Targeting

Monetary Policy and the International Economy Key Terms

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Goals of Monetary Policy

MONETARY POLICY AND THE INTERNATIONAL ECONOMY

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy

Federal Reserve Purchase of Bonds

Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications

Monetary Policy and the International Economy Key Terms

Net export effect Macro stability and the trade balance The Big Picture

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monetary policy open-market operations reserve ratio discount rate easy money policy tight money policy Federal funds rate prime interest rate velocity of money cyclical asymmetry inflation targeting
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Goals of Monetary Policy

Consolidated Balance Sheet of the Federal Reserve Banks Tools of Monetary Policy Federal Reserve Purchase of Bonds Monetary Policy, Real GDP, and the Price Level Monetary Policy and Equilibrium GDP Monetary Policy in Action Problems and Complications Monetary Policy and the International Economy Key Terms

Extending the Analysis of Aggregate Supply

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