Title: Eco 6351 Economics for Managers Chapter 14. Monetary Policy
1Eco 6351Economics for ManagersChapter 14.
Monetary Policy
2In Chapter 14 we will focus on
- The Demand for Money
- Interest Rate Determination
- Controlling the Money Supply
- Monetary Policy
3The 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.
4The Demand for Money
- Figure shows the demand for money curve.
- A change in the interest rate brings a movement
along the demand curve.
5The 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.
6Interest Rate Determination
- The interest rate is determined such that the
quantity of money demanded equals the quantity
supplied.
7The 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.
8Monetary 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.
9Influencing Interest Rates
- Initially, the money supply curve is MS0.
- The interest rate is 5 percent.
10Influencing Interest Rates
- Suppose the Fed increases the money supply MS1.
- The interest rate falls to 3 percent.
11Influencing Interest Rates
- Suppose the Fed decreases the money supply MS2.
- The interest rate rises to 7 percent.