Econ 104 1st Edition Lecture 25 Outline of Last Lecture I. Housing Bubble II. Great Recession III. Money vs. BarterIV. 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 LectureI. The Money Market a. Supply of M1: is vertical; it is controlled by the Federal Reserveb. Demand for M1: represents the transactions demand for money i. Demand for M1 is negatively related to interest rateII. 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 funds2. Buy bonds ii. OMS shifts the money supply to the left b. Shifts in Money Demandi. 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 III. 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)IV. 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.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 V. Monetary Policy and Inflation: OMS a. Suppose the Federal Reserve engineers an OMS of treasury securities = $1,000i. Buyer of Treasury securities (From the Fed) 1. Write checks to the Fed2. Deposits are down and money supply is downb. An OMS of $1,000 decreases the M1 supply by how much?i. If rr= .101. -$1,000 x (1/.10) = -$10,000ii. There will be a shortage of loanable funds. 1. A decrease in M1c. The increase in interest rates decreases C, I, and NX and AD shifts back to AD1i. When interest rates are up, the exchange rate increases, and NX goes down VI. The Challenges of Monetary
View Full Document
Unlocking...