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Money and Banking The Fed and Monetary Policy Monetarism

VIEWS: 3 PAGES: 13

									    Money and Banking
The Fed and Monetary Policy
        Monetarism




        Ryan Connolly
        Jon Pignatelli
 Oversimplified Deposit Creation Formula

• Original Deposit x 1/Reserve Requirement=
New Deposits Created
- Original Deposit = total new money supply

- Only subtract original deposit When it isn’t
  the fed
       Federal Reserve System
• Group of people in charge of monetary policy
• Created in 1913 with Federal Reserve Act
• Made up a group of governors that are
  appointed by the president
• Decisions are independent of congress
 Major Advantages of Federal institutions
            Independence
• The Fed doesn’t have to worry about politics
• Are separate from the rest of the government
• Have their own systems and rulings
What are the Fed tools of Monetary Policy

• There are four tools of monetary policy
  – Buying and Selling Bonds
  – Reserve Requirements
  – Federal Funds Rate
  – Discount Rate
       Expansionary Monetary Policy
•   Open Market Operations - Buy bonds
•   Reserve Requirement – Down
•   Discount Rate – Down
•   Fed Funds Rate – Down

• Money Supply goes up, Interest Rates go
  down
   What affects do the tools of monetary
    policy have on the Keynesian model
   C+I+G+(X-IM) and therefore RGDP and
                Price levels?

• Monetary policy affects interest rates
• Interest rates have a direct affect on
  Investment spending
 When would expansionary policy be the
  most inflationary? Least Inflationary?

• Expansionary policy is most inflationary when
  the AS curve is the steepest and there is little
  slack in the economy
• Expansionary policy is the least inflationary
  when the AS curve is shallow and there is lots
  of slack in the economy
 If fed decides to stabilize the growth of
 money supply, what does it lose control
                   over?
• If there is an increase in the demand for
  money, interest rates increase and money
  supply incre4ases.
• The Fed must make a choice – if it wants to
  control interest rates (bring them back down)
  it will have to increase money supply
• They can’t control both in the face of
  increases in the demand for monmey
What is monetizing the debt and how does
                it occur?
• If the government is using deficit spending
• They have to borrow money – sell bonds
• The increase in G will cause an increase in
  interest rates (demand for money increases)
• This could cause crowding out
• To avoid crowding the out the Fed could buy
  the bonds the government is selling to keep
  interest rates down
• They created money from the government’s
  debt – monetized the debt
  Who are the monetarists and what are
              their beliefs
• The main factor that causes changes in the
  economy is the money supply and its growth.
• The money supply should be allowed to grow
  at a fixed amount each year and there should
  be no more intervention than that.
• They believe that the AS curve is vertical
• So any messing with A.D. will only cause
  inflation
 What is the Expression MxV=PxY
• Money Supply x Velocity = Prices x Output
 When looking at the quantity theory of
money (equation of exchange) what would
occur due to a large increase in the money
  supply when the economy is near full
              Employment?

• It will cause inflation

								
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