1 / 30

THE FEDERAL RESERVE SYSTEM: PART II - PowerPoint PPT Presentation

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)

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

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

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

Chapter 12 (pgs 364-374)

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

 changes in consumption and investment

 changes in GDP

MS is under the control of the Federal Reserve.

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

M = quantity of money

i = nominal rate of interest

1) open market operations

2) changes in the discount rate

3) changes in required reserve ratios

 MS  MS function shifts outward

MS shift of bonds.

Open market sale  MS

 MS function shifts inward

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 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) of 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.

a)  iM

b)  i M

Shifts in MD relationship between MD and i.

1) Changes in Y.

2) Changes in P.

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 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 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 Equilibrium relationship between MD and i.

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