Econ 4.3

Wednesday, March 24, 1999

Announcements: Homeworks 6 and 7 are due on Monday.

Lecture notes:  

Monetary Policy

• The Federal Reserve Board of Governors
  • Alan Greenspan, Chairman
  • Alice Rivlin, Vice Chair
  • Seven members -- each serving a 14 year term

Demand for Money, Investment, GDP and Monetary Policy

• Demand for money and the interest rate
  • transactions demand
  • precautionary demand
  • asset demand
• Money Market
• Investment Demand
• Money, Interest and determination of GDP
• Monetary Policy Tools
• Monetary Policy, money, interest, injections, GDP determination
• Keynesian "liquidity" trap
• Keynesian Monetary transmission linkages

• See Figure 13.3 on page 277 in the textbook
• Md = Demand for Money
• Ms = Supply for Money
• To increase interest rate -- move money supply to left
• Investment Demand and Injections
• % Return on Investment

• Federal Funds Rate -- what one bank pays another bank to borrow reserves
• Federal Funds Market
• Tight Money -- decrease money supply, raise interest rate, reduce investment, reduce GDP