The federal reserve system part ii
Download
1 / 30

THE FEDERAL RESERVE SYSTEM: PART II - PowerPoint PPT Presentation


  • 42 Views
  • Uploaded on

THE FEDERAL RESERVE SYSTEM: PART II. Chapter 12 (pgs 364-374). Money Supply and Money Demand: Overview. Changes in the supply of money (MS) interact with the demand for money (MD) to determine the nominal interest rate (i). Changes in the nominal rate of interest (i)

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' THE FEDERAL RESERVE SYSTEM: PART II' - goldy


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The federal reserve system part ii

THE FEDERAL RESERVE SYSTEM:PART II

Chapter 12 (pgs 364-374)


Money supply and money demand overview
Money Supply and Money Demand: Overview

Changes in the supply of money (MS) interact with the demand for money (MD) to determine the nominal interest rate (i).


Changes in the nominal rate of interest (i)

 changes in consumption and investment

 changes in GDP


Money supply ms
Money Supply (MS)

MS is under the control of the Federal Reserve.

Because the Federal Reserve sets MS, we draw the MS function as a vertical line.



Where
where

M = quantity of money

i = nominal rate of interest


The federal reserve can shift ms
The Federal Reserve can shift MS

1) open market operations

2) changes in the discount rate

3) changes in required reserve ratios


Suppose the Federal Reserve makes an open market purchase of bonds.

 MS  MS function shifts outward


Ms shift
MS shift of bonds.


An open market sale by the federal reserve will reduce ms
An open market sale, by the Federal Reserve, will reduce MS. of bonds.

Open market sale  MS

 MS function shifts inward


Money demand
Money Demand of bonds.

Portfolio Allocation Decision—the decision about the forms in which to hold wealth.

Demand for Money—the amount of wealth an individual chooses to hold in the form of money—M1.


The of bonds.money demand curve relates the aggregate quantity of money demanded (MD) to i.


Define
Define of bonds.

MD = demand for nominal money

P = the price level (GDP deflator)

Y = real income (real GDP)

i = nominal rate of interest


Md f i y p
MD = f(i,Y,P) of bonds.


I nominal interest rate on bonds
i = nominal interest rate of bonds.on bonds

1)There are many assets which individuals may hold in place of money (M).

2)We lump together all non-M assets and call them bonds.

3)i is the rate of return on alternative assets.



There is an inverse relationship between i and M. M.

a)  iM

b)  i M




Shifts in md
Shifts in MD relationship between MD and i.

1) Changes in Y.

2) Changes in P.


Y real income
Y—real income relationship between MD and i.

1)MD depends on the level of spending.

 spending  MD

2)The level of spending depends mainly on Y.

a)  Y  MD

b)  Y  MD

3)Changes in Y shift MD.


relationship between MD and i.Y


P price level
P—price level relationship between MD and i.

1) MD depends on the level of spending.

2) The level of spending depends partly on P.

a)  P  MD

b) P  MD

3) Changes in P shift MD.


relationship between MD and i. P


Money market equilibrium
Money Market Equilibrium relationship between MD and i.

The money market is in equilibrium when the QD for M = QS of M. This is the point where MD and MS intersect.


Money market equilibrium1
Money Market Equilibrium relationship between MD and i.


Changes in money market equilibrium
Changes in Money Market Equilibrium relationship between MD and i.

1) MD--- ΔY or ΔP2) MS—Fed actions


relationship between MD and i.Y


relationship between MD and i. P


relationship between MD and i.MS


ad