TAILIEUCHUNG - Lecture Economics (18th edition): Chapter 33 - McConnell, Brue, Flynn's
Chapter 33 - Interest rates and monetary policy. After reading this chapter, you should be able to: Discuss how the equilibrium interest rate is determined in the market for money, list and explain the goals and tools of monetary policy, describe the Federal funds rate and how the Fed directly influences it, identify the mechanisms by which monetary policy affects GDP and the price level, explain the effectiveness of monetary policy and its shortcomings. | Interest Rates and Monetary Policy Chapter 33 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives The equilibrium interest rate and the market for money Monetary policy How the Fed controls the Federal funds rate How monetary policy affects GDP and the price level Effectiveness of monetary policy and its shortcomings 33- Interest Rates Price paid for the use of money Many different interest rates Speak as if only one interest rate Determined by money supply and money demand 33- Demand for Money Why hold money? Transactions demand, D1 Determined by nominal GDP Independent of the interest rate Asset demand, D2 Money as a store of value Varies inversely with the interest rate Total money demand, Dm 33- Demand for Money Rate of interest, i percent 10 5 0 50 100 150 200 50 100 150 200 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Amount of money demanded (billions of dollars) Amount of money demanded and supplied (billions of dollars) = + (a) Transactions demand for money, Dt (b) Asset demand for money, Da (c) Total demand for money, Dm and supply Dt Da Dm Sm 5 33- Interest Rates Equilibrium interest rate Changes with shifts in money supply and money demand Interest rates and bond prices Inversely related Bond pays fixed annual interest payment Lower bond price will raise the interest rate 33- Federal Reserve Balance Sheet Assets Securities Loans to commercial banks Liabilities Reserves of commercial banks Treasury deposits Federal Reserve Notes outstanding 33- Securities Loans to Commercial Banks All Other Assets Total Reserves of Commercial Banks Treasury Deposits Federal Reserve Notes (Outstanding) All Other Liabilities and Net Worth Total February 14, 2008 (in Millions) Assets Liabilities and Net Worth Source: Federal Reserve Statistical Release, , February 14, 2008 $713,369 60,039 111,689 $885,097 $ 11,312 4,979 778,937 89,869 $885,097 Federal .
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