Econ 104 1st Edition Lecture 26 Outline of Last Lecture I The Money Market II Shifts in Money Supply and Demand III Monetary Policy and Recession IV Monetary Policy and Inflation Outline of Current Lecture II Challenges of Monetary Policy III Types of Lags IV Great Recession I II III Current Lecture The Challenges of Monetary Policy a Recognition Lag i Time between when a significant change in the economy performance occurs and policy makes recognition of it b Policy Lag i Time between the recognition of the need for action and when policy adjustment is decided upon is set in motion c Impact Lag i The time between policy action and its impact on price employment and output Because of lag and economic forecast uncertainty a The fed uses an intermediate target to guide day to day operations i Rationale if the Fed hits the intermediate target it will come reasonably close to hitting the final target ii Currently the Fed uses an interest rate target The interest rate target is reliably and predictably related to output and inflation 1 When the Fed changes the target rate usually other interest rates move in the same direction Conclusions of Monetary Policy a Monetary policy in the case of recession is often referred to as expansionary or simulative policy and in the case of inflation it is referred to as contractionary b The FOMC adjusts the level of the money supply to affect interest rates the federal funds rate i Fed increases the money supply and the interest rate falls 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 IV V c The policy process involves 3 lags i Recognition policy and impact d Because of the complexities and lags involved with monetary policy the Fed uses intermediate targets Currently the fed targets the interest rate Fed Funds Rate Monetary Policy and the Great Recession a OMP to lower short term interest rates i Interest rates went down to almost zero 1 Did little to stimulate the economy b WHY i Banks were holding onto ER excessive reserves rather than lending them out 1 Total bank reserves went form 50 billion to 900 billion c Why were banks holding on to ER i Primary reason Banks hesitated to lend This is called a credit crunch ii The Fed started paying interest 25 on ER d How did the Fed stimulate the demand for housing and increase AD i Quantitative casing Fed purchased securities to lower long term interest rates Conclusions about Monetary Policy and the Great Recession a How do policy makers at the Fed typically respond to recession i Lower interest rates b How did the Fed respond to the Great Recession i Targeting long term interest rates c The Great Recession was Great because i It was proceeded by financial crisis d Is the US economy back to full employment output i No because there is low inflation and a weak number of jobs being created e Does the Fed control interest rates i No f Why should the Fed be clear about its monetary policy objectives i So businesses will know what will happen
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