EC202 1nd Edition Lecture 31Outline of Last Lecture I. Money supplyOutline of Current Lecture II. Nominal interest rateIII. Federal funds rateCurrent Lecture-Fed control of nominal interest rate-When the Fed changes the money supply --- the equilibrium nominal interest rate changes-The Fed sets the short-run interest rate-If the Fed increases the money supply, the interest rate falls-If the Fed decreases the money supply, the interest rate rises-The Fed’s primary tool -Open-market operations-Buying bonds to increase the money supply-Selling bonds to decrease the money supply-federal funds rate-The Fed targets the federal funds rate -Short-term interest rates tend to move together-This causes other short-term interest rates to change in the same direction-The Fed’s control of long-run interest rates is limited-Quantity Theory of MoneyThese 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 proposition that in the long run, the velocity of money (as defined below) is constant and output is constant at the potential output level-Velocity of Money-The average speed with which a dollar circulates in the economy as people use it to buy goods and services — nominal GDP divided by quantity of
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