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Chapter 15 - Interest rates and monetary policy. This chapter starts by introducing the transactions and asset demand for money and explaining how the interaction of the demand and supply of money determines the interest rates in the market. We will learn about tools other than open market operations that the Fed might use to manipulate the money supply and the reasons that these tools are chosen, or not chosen. | Chapter 15 Interest Rates and Monetary Policy McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved This chapter starts by introducing the transactions and asset demand for money and explaining how the interaction of the demand and supply of money determines the interest rates in the market. Banks’ balance sheets are used to explain how open market operations are effective in changing the money supply. We will learn about tools other than open market operations that the Fed might use to manipulate the money supply and the reasons that these tools are chosen, or not chosen. We will then evaluate expansionary and restrictive monetary policy, conditions under which these policies should be used, and how they impact interest rates, investment, and aggregate demand. We close with a discussion of issues related to monetary policy and current monetary policy. Interest Rates The price paid for the use of money Many different interest rates Speak as if only one interest rate Determined by the money supply and money demand 15- Understanding interest rates is a key economic concept. For example, imagine a gentleman who was beginning a new career working for an investment firm. He did not have a business background, but he was a salesman. One evening as he was discussing his new career with an economist friend, he told his friend that the reason his firm could offer investors a much higher return than the banks was because his firm had been around for over 100 years and, therefore, was considered “safer” than a bank and did not have to purchase insurance to safeguard depositors’ funds like banks did. The economist stopped him and had to explain to him that actually it was the opposite: His firm had to pay a higher interest rate to investors to compensate the investors for their increased risk with his firm because their investments were not insured. Types of Interest Rates Type of Interest Rate Annual Percentage 20-year Treasury | Chapter 15 Interest Rates and Monetary Policy McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved This chapter starts by introducing the transactions and asset demand for money and explaining how the interaction of the demand and supply of money determines the interest rates in the market. Banks’ balance sheets are used to explain how open market operations are effective in changing the money supply. We will learn about tools other than open market operations that the Fed might use to manipulate the money supply and the reasons that these tools are chosen, or not chosen. We will then evaluate expansionary and restrictive monetary policy, conditions under which these policies should be used, and how they impact interest rates, investment, and aggregate demand. We close with a discussion of issues related to monetary policy and current monetary policy. Interest Rates The price paid for the use of money Many different interest rates Speak as if .
