Transcript Monetary Policy and the Interest Rate

BUDGET FUN!

Federal.budgetchallenge.org/pages/overview
Time to take a budget challenge!
 Go
to the Congressional Budget Office page,
under “Topics”, pick a topic you and your partner
would like to read.
 Chose ONE article and outline some of the
findings of the CBO.


WRITE DOWN 2-3 questions your article has raised
and be prepared to discuss!
Be ready to present your findings to class
Monetary
Policy and the
Interest Rate
Module 31
Monetary Policy and Interest
Rate
 Review!

MM and LFM
 Short
Run – r determined by MM
 Long Run – r is determined by the supply and
demand of LF that arise when GDP is at full
potential
Monetary Policy and
Aggregate Demand
 Monetary

Policies and the r
Federal Funds Rate
 The
Fed sets a target FFR
 Impacts the money supply
 Open market operations are preferred by the
Fed
 Currently: 0%-0.25%

Expansionary and Contractionary Monetary
Policies
Monetary Policy in Practice
 Monetary
right:





Policy that shifts the AD curve
Fed expands money supply
Rates drop
More investment spending
Leads to I rGDP
I consumer spending
 EXPANSIONARY!
Monetary Policies in Practice
 Money
supply is contracted:
Fed contracts money supply
 Leads to I investment rates
c
I investment spending
 cI rGDP
 cI consumer spending

 Part
of the Fed’s dual mandate is price (inflation)
control

Taylor Rule for Monetary Policy
 Set
FFR to account for inflation rates and output gaps:
 FFR = 1 + (1.5 x infl. Rate) + (0.5 x OG)
Taylor Rule Continued
 Taylor


Rule
Predicts what Fed SHOULD do
Very good at predicting Fed behavior for economics
 Accounts
 Inflation


for inflation and output gap issues
Targets
Fed’s mandate keep inflation low but no set rate is
preferred
Inflation Target – the rate the central bank wants to
achieve
 Forward
looking
 Taylor Rule looks back at past inflation rate for policy
decisions
 Helps with transparency for the public
Monetary Policy and Interest
Rates
 Monetary/fiscal

policy failures
Over-borrowing (debt/deficit)
 Causes
crowding out, implications for future debt
 Austerity – drastic cuts in social programs

Inflation, Hyperinflation, Seigniorage
 Money

supply disruption
Results:
 Poverty,
social conflict, political classes, inflationary
issues, loss of FDI/borrowing power
Monetary Policy and Interest
Rates
 Regulations

Regulatory powers reside in multiple agencies:
 FED
 SEC
 Treasury

Department
No major reform after 2008 collapse, however some
changes:
 Stress
tests
 Dodd-Frank Bill

Still in flux
Money, Output,
and and Prices
in the Long Run
Module 32
Money, Output, and Prices



Monetary policy action (not Fiscal) is the usual
tool of choice for economic stabilization
But – can a central bank make inappropriate
decisions regarding
expansionary/contractionary policy?
In the long-run, the economy self corrects, so
is correct policy an issue

YES, it still can cause mass changes in the short
run
Effects of an Increase
in the Money Supply
 In
SR in increase in
MS pushes AD right
(lower rates =
increased consumer
spending,
investment
 But y2 is above YP so
in the LR, nominal
wages will rise,
increases SRAs until it
gets to SRAS2, or
equilibrium
 In the end, APL
increases
Monetary Neutrality
 So

changes in MS can affect APL
Changes are directly linked
 If
there is a 25% change in MS, APL falls 25% in
LR
 Exactly proportional


This is known as money neutrality
rGDP and the “value” of money does not
change
Changes in the Money Supply
and the Interest Rate in the
Long-Run
 Lessons?


The Fed functions as a SR economic
stabilizer, in the LR, gaps, wages, selfcorrection
In the LR, changes in MS do NOT affect the
money supply at all
Poster Sessions
 You
will choose an economics concept from Mods
33 or 34 (draw straws!)
 Use a laptop, your book, or another text to explore
your concept.
 Use your creativity to provide visual and
informational components to a “poster”
 Hang your poster!
 Walk throughout the classroom and take notes, ask
questions, and provide feedback to the authors!
6/7th Groups
10th groups