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CHAPTER 5. Monetary Theory and Policy. CHAPTER 5 OVERVIEW. This chapter will: A. Describe the impact of monetary policy B. Explain the tradeoffs involved in monetary policy C. Describe how financial market participants monitor and forecast the Fed’s policies. A. Impact of Monetary Policy.

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Presentation Transcript
Chapter 5

CHAPTER 5

Monetary Theory and Policy


Chapter 5 overview
CHAPTER 5 OVERVIEW

This chapter will:

A. Describe the impact of monetary policy

B. Explain the tradeoffs involved in monetary policy

C. Describe how financial market participants monitor and forecast the Fed’s policies


A impact of monetary policy
A. Impact of Monetary Policy

1. Correcting a Weak Economy

a. Fed can stimulate the economy by creating a loose-money policy and engages in

1.) buying government securities

2.) lowering the lending rate

3.) lowering the reserve requirement




A impact of monetary policy1
A. Impact of Monetary Policy Conditions

2. Correcting High Inflation

a. The Fed can constrain economic activity when it creates a tight-money policy and

1.) sells government securities

2.) raises the lending rate

3.) increases the reserve requirement




B tradeoff in monetary policy
B. Tradeoff in Monetary Policy Conditions (continued)

1. The Tradeoff

a. Studies indicate there exists an inverse relationship between inflation and unemployment

  • the lower the unemployment, the greater the inflation,

  • the higher the unemployment, the lower the inflation



B tradeoff in monetary policy1
B. Tradeoff in Monetary Policy Unemployment

2. When inflation is high, tight money policy is considered.

Tradeoff is higher unemployment


B tradeoff in monetary policy2
B. Tradeoff in Monetary Policy Unemployment

3. When unemployment is high, loose-money policy is considered.

Trade off is higher inflation


C monitoring and forecasting the fed s policy
C. Monitoring and Forecasting the Fed’s Policy Unemployment

1. Economic Indicators Monitored by the Fed

a. Indicators of Economic Growth

1.) GDP

2.) Industrial production index

3.) Unemployment rate

4.) Consumer confidence surveys

b. Index of Leading, Coincident, and Lagging Indicators


C monitoring and forecasting the fed s policy1
C. Monitoring and Forecasting the Fed’s Policy Unemployment

2. Indicators of Inflation

a. Producer and Consumer Price Indexes

b. Other Indicators


Discussion
Discussion Unemployment

  • How Fed Chair’s speech affect financial market


Summary
Summary Unemployment

  • 1. The effect of monetary policy

  • 2. Homework Assignment 3 continue: Questions and Applications 1,2.


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