ECON 204 1st Edition Lecture 17Outline of Last Lecture XXII. The FedA. Functions of Federal Reserve banksB. Open-Market OperationsC. Review of bankingOutline of Current LectureXXIII. Monetary Policy A. Money multiplierB. More on monetary policyCurrent LectureXXIII. Monetary Policy A. Money multiplierMoney multiplier: 1/rr (1/rr = m)You are thinking about what banks LEND not save. Change in money supply – M +M (1-rr) : gives you what they lendChange in MS – M + M(1-rr) + M(1-rr)^2 + M(1-rr)^3 etc…M[1+(1-rr) + (1-rr)^2 + (1-rr)^3 …]S = [1+(1-rr) + (1-rr)^2 + (1-rr)^3 …]S-S(1-rr) = 1S[1-1+m] = 1 Note: 1 and -1 cancel outS(rr) = 1S = 1/rrChange in money supply = M(1/rr) = M/rrB. More on monetary policyAn increase in monetary supply reduces the interest rate and increases aggregate demand but the eventual rise in nominal wages leads to a fall in short run aggregate supply and aggregate output falls back to potential output. Monetary policy does not have an effect in the long run because nominal wages catch up.The interest rate returns to its original level in the long run (lowers in the short run).The relationship between the output gap and federal funds rates is closer than that of inflation and the federal funds rate.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.The Fed influences labor
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