Eco 6351 Economics for Managers Chapter 14. Monetary Policy

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Eco 6351 Economics for Managers Chapter 14. Monetary Policy

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Title: Eco 6351 Economics for Managers Chapter 14. Monetary Policy


1
Eco 6351Economics for ManagersChapter 14.
Monetary Policy
  • Prof. Vera Adamchik

2
In Chapter 14 we will focus on
  • The Demand for Money
  • Interest Rate Determination
  • Controlling the Money Supply
  • Monetary Policy

3
The Demand for Money
  • Money is a stock - an inventory.
  • There is a limit to how much money we want to
    hold.
  • The quantity of real money that people plan to
    hold depends on the interest rate.
  • The quantity of money demanded varies inversely
    with the interest rate.

4
The Demand for Money
  • Figure shows the demand for money curve.
  • A change in the interest rate brings a movement
    along the demand curve.

5
The Supply of Money
  • The Federal Reserve Bank determines the supply of
    money.
  • At any given point of time, the supply of money
    is fixed. It is represented by the vertical line
    labeled MS.

6
Interest Rate Determination
  • The interest rate is determined such that the
    quantity of money demanded equals the quantity
    supplied.

7
The Federal Reserve System
  • The Central Bank of the U.S. is the Federal
    Reserve System.
  • A central bank is a banks bank it is not a
    citizens bank.
  • The Fed conducts the nations monetary policy,
    which means that it adjusts the quantity of money
    in circulation.

8
Monetary Policy Tools
  • The Fed uses three main policy tools to achieve
    its objectives. They are
  • required reserve ratios
  • discount rate
  • open market operations
  • A decrease in the money supply raises interest
    rates.
  • An increase in the money supply lowers interest
    rates.

9
Influencing Interest Rates
  • Initially, the money supply curve is MS0.
  • The interest rate is 5 percent.

10
Influencing Interest Rates
  • Suppose the Fed increases the money supply MS1.
  • The interest rate falls to 3 percent.

11
Influencing Interest Rates
  • Suppose the Fed decreases the money supply MS2.
  • The interest rate rises to 7 percent.
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