Transcript 17.2 Monetary Policy in the Short Run

17.2 Monetary Policy
in the Short Run
Objectives
 Explain the shape of the money demand curve.
 Explain how changes in the money supply
affect interest rates and real GDP in the short
run.
 Discuss the federal funds rate and why the Fed
uses this rate to pursue monetary policy goals.
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17.2 Monetary Policy
in the Short Run
Key Terms
 money demand
 money supply
 federal funds market
 federal funds rate
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17.2 Monetary Policy in the Short Run
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Money Demand
A medium of exchange
A store of value
The cost of holding money
Money demand and interest rates
Money demand—the relationship between
how much money people want to hold and the
interest rate
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Demand for Money
 The money demand
curve, Dm, slopes
downward.
 As the interest rate falls,
so does the opportunity
cost of holding money.
 The quantity of money
demanded increases.
Figure 17.2
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Money Supply and
the Market Interest Rate
Money supply—the supply of money
available in the economy at a particular
time
Market interest rate
An increase in the money supply
Effect of lower interest rates
Increasing interest rates
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Effect of an Increase
in the Money Supply
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Figure 17.3
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Ways to Expand the Money Supply
Purchasing U.S. government securities
Reducing the discount rate
Lowering the required reserve ratio
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Effects of a
Lower Interest Rate
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Figure 17.4
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Ways to Reduce the Money Supply
Selling U.S. government securities
Increasing the discount rate
Raising the required reserve ratio
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The Federal Funds Rate
 Federal funds market
 Federal funds market—a market for overnight
lending and borrowing of reserves held by the Fed for
banks
 Federal funds rate—the interest rate banks charge
one another to borrow reserves overnight; the Fed’s
target interest rate
 Aggressive rate cuts
 Why target this rate?
 Recent history of federal funds rate
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17.2 Monetary Policy in the Short Run
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Ups and Downs in the
Federal Funds Rate Since 1996
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Figure 17.5
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