Monetary Policy

1
Monetary Policy

• Chapter 15

2
Fed Assets and Liabilities
Chapter 15 Table 15.1
3
Fed Assets and Liabilities

• The Principal Asset is U.S. Treasury Bonds
• (Securities)
• The Principal Liability is Federal Reserve Notes
  Outstanding
• These nearly balance because the bonds were
  acquired putting the dollars into circulation
• The Feds available stock of bonds could be used
  to remove the dollars from circulation
• Bonds expire dollars dont

4
Putting Money into Circulation
Chapter 15 Figure 15.1
5
Changing the Reserve Ratio
Chapter 15 Table 15.2
6
The Impact of Changing the Money Supply on the
Interest Rate
Chapter 15 Figure 15.2(a)
7
How Changing the Money Supply and the Interest
Rate affect Investment Spending
Chapter 15 Figure 15.2(b)
8
How Monetary Policy Affects Real Output and
Employment

• Increasing the Money Supply lowers interest rates
• Lower interest rates lead to more borrowing and
  higher Investment spending (Ig)
• Increasing AE and AD
• Resulting in higher equilibrium GDP
• And higher employment
• But higher prices (inflation)

9
Chapter 15 Figure 15.2(c)
10
Chapter 15 Table 15.3
11
The Federal Funds Rate determines other Interest
Rates
Chapter 15 Figure 15.3
12
Chapter 15 Table 15.4
13
Public Policy and AS
Chapter 15 Figure 15.4(a)
14
Fiscal and Monetary Policy and AD
Chapter 15 Figure 15.4(b)