Transcript Chapter 15 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
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C HAPTE R
Monetary Policy and
Equilibrium GDP
Monetary
Policy
Monetary Policy in
Action
Problems and
Complications
FEDERAL RESERVE BANK OF THE U.S.
Monetary Policy and the
International Economy
Key Terms
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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 full-employment,
noninflationary level
of total output
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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
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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ASSETS
• Securities
• Loans to Commercial Banks
LIABILITIES
• 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
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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Open-Market Operations
Buying Securities
From commercial banks...
• Bank gives up securities
• FED pays bank
• Banks have increased reserves
From the public...
• Public gives up securities
• Public deposits check in bank
• Banks have increased reserves
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
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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Open-Market Operations
Selling Securities
To commercial banks...
• FED gives up securities
• Bank pays for securities
• Banks have decreased reserves
To the public...
• FED gives up securities
• Public pays by check from bank
• Banks have decreased reserves
Copyright McGraw-Hill/Irwin, 2005
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
FEDERAL RESERVE
PURCHASE OF BONDS
Purchase of a
$1000 bond
from a bank...
New reserves
$800
Excess
Reserves
$200
Required
reserves
Monetary Policy and
Equilibrium GDP
Monetary Policy in
Action
Problems and
Complications
Monetary Policy and the
International Economy
$4000
Bank System Lending
Key Terms
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$1000
Initial
Deposit
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Total Increase in Money Supply ($5000)
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
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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Open-Market Operations
The Reserve Ratio
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
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
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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Open-Market Operations
The Reserve Ratio
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
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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Open-Market Operations
The Reserve Ratio
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
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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Open-Market Operations
The Reserve Ratio
The Discount Rate
Discuss relative
Easy Money Policy
importance
Tight Money Policy
each
control
•of
Sell
Securities
• Increase Reserve Ratio
• Raise Discount Rate
Copyright McGraw-Hill/Irwin, 2005
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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MONETARY POLICY, REAL GDP,
AND THE PRICE LEVEL
Cause-Effect Chain
• 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
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
Real rate of interest, i
Goals of Monetary Policy
Monetary Policy and
Equilibrium GDP
10
10
8
8
6
6
Dm
0
Monetary Policy in
Action
Quantity of money demanded and supplied
AS
Key Terms
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Price level
Problems and
Complications
Monetary Policy and the
International Economy
Investment
Demand
P3
P2
P1
AD3(I=$25)
AD2(I=$20)
AD1(I=$15)
Real domestic output, GDP
Copyright McGraw-Hill/Irwin, 2005
0
Amount of investment, i
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.
MONETARY POLICY AND EQUILIBRIUM GDP
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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Money Market
•Investment
•Equilibrium GDP
Effects of an easy money
policy
Effects of a tight money
policy
Copyright McGraw-Hill/Irwin, 2005
MONETARY POLICY IN ACTION
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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Strengths of monetary policy
• Speed and flexibility
• Isolation from political
pressure
Focus on the Federal Funds Rate
The Federal Funds Rate
The Prime Interest Rate
Recent Monetary Policy
Copyright McGraw-Hill/Irwin, 2005
Problems and Complications
Goals of Monetary Policy
Consolidated Balance
Sheet of the Federal
Reserve Banks
Lags
Tools of Monetary Policy
Federal Reserve Purchase
of Bonds
Monetary Policy, Real
GDP, and the Price Level
Changes in Velocity
Monetary Policy and
Equilibrium GDP
Monetary Policy in
Action
Problems and
Complications
Monetary Policy and the
International Economy
Key Terms
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Cyclical Asymmetry
“Artful Management”
or “Inflation Targeting”
Copyright McGraw-Hill/Irwin, 2005
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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MONETARY POLICY AND THE
INTERNATIONAL ECONOMY
• 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
Copyright McGraw-Hill/Irwin, 2005
BACK
END
Goals of Monetary Policy
Consolidated Balance
Sheet of the Federal
Reserve Banks
Extending the Analysis
of Aggregate Supply
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
Next
Chapter 16
Problems and
Complications
Monetary Policy and the
International Economy
Key Terms
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Copyright McGraw-Hill/Irwin, 2005