Econ 104 1st Edition Lecture 25 Outline of Last Lecture I Housing Bubble II Great Recession III Money vs Barter IV Balance Sheet of a Bank V Simple Deposit Multiplier VI Federal Reserve Outline of Current Lecture II The Money Market III Shifts in Money Supply and Demand IV Monetary Policy and Recession V Monetary Policy and Inflation Current Lecture I II III IV The Money Market a Supply of M1 is vertical it is controlled by the Federal Reserve b Demand for M1 represents the transactions demand for money i Demand for M1 is negatively related to interest rate Shifts in Money Supply and Money Demand a Shifts in Money Supply i OMP shifts the money supply to the right 1 Real interest rate goes down and there is a surplus of loanable funds 2 Buy bonds ii OMS shifts the money supply to the left b Shifts in Money Demand i Money Demand f Y P ii Positive change in Y increases the demand for money for transaction iii Positive change in P increases M1 required to pay for Transaction Monetary Policy and Recession a Suppose there is a sudden drop in consumer and business confidence and AD shifts to the left SR equilibrium has Y less than Y bar b The decrease in interest rates increases C I NX and AD shifts back to AD1 When interest rates fall the value of the dollar falls Monetary Policy response to recession Open Market Purchase OMP 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 V VI a Suppose the Fed engineers an OMP of treasury securities 1 000 Fed Treasury Bonds from the public private buys investors i Sellers of treasury securities to the Fed deposit the Fed s checks Monetary Policy and Inflation OMS a Suppose the Federal Reserve engineers an OMS of treasury securities 1 000 i Buyer of Treasury securities From the Fed 1 Write checks to the Fed 2 Deposits are down and money supply is down b An OMS of 1 000 decreases the M1 supply by how much i If rr 10 1 1 000 x 1 10 10 000 ii There will be a shortage of loanable funds 1 A decrease in M1 c The increase in interest rates decreases C I and NX and AD shifts back to AD1 i When interest rates are up the exchange rate increases and NX goes down The Challenges of Monetary Policy
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