logging in or signing up Unit4 MonetaryPolicy Summary Graphs Gulkund Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 1890 Category: Education License: All Rights Reserved Like it (1) Dislike it (0) Added: April 13, 2008 This Presentation is Public Favorites: 2 Presentation Description No description available. Comments Posting comment... By: uzmesal (31 month(s) ago) i would like to request a download of this ppt. Saving..... Post Reply Close Saving..... Edit Comment Close By: uzmesal (31 month(s) ago) this presentation on MP is very informative, prescise and real good to develop basic concepts about the and impacts of MP. Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Monetary Policy: Monetary Policy Effects on: Money Supply Bond Prices Interest Rates Exchange Rates Exports and Imports Aggregate DemandRecession or Less than Full-Employment What can the Federal Reserve do?: Recession or Less than Full-Employment What can the Federal Reserve do? Buy Bonds (Securities) –Most likely Lower the Reserve Requirement Lower the Discount RateBuying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will put more money into the banking system. Supply of funds available in the banking system will INCREASE!!: Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will put more money into the banking system. Supply of funds available in the banking system will INCREASE!! Nominal Interest Rate Money Supply I* Qm* Qm1 I1 MS* MS1 DM* The Federal Reserve Controls the Money Supply, which determines the Nominal Interest Rate in the Short-Term Money Markets Slide4: Quantity of Bonds Supply of Bonds Pb* Qb* The Bond (Securities) Market Demand for Bonds Price of Bonds When the Fed buys bonds, they take bonds out of the Bond Market. This Decreases the Supply of Bonds. The Price of Bonds varies INVERSELY with Interest Rate. As the Price of Bonds go up, the Interest rate on the bonds goes down. Most interest rates charged to C, I and or G are link to bond prices. Qb1 Pb1 Sb1The Fed Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will increase the money available to the banking system . The Supply of funds to be loaned out will INCREASE!! (The Market for Loanable Funds establishes the REAL Interest Rates (Long-Term Rates). : The Fed Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will increase the money available to the banking system . The Supply of funds to be loaned out will INCREASE!! (The Market for Loanable Funds establishes the REAL Interest Rates (Long-Term Rates). Real Interest Rate Market for Loanable Funds I* Demand for Loanable Funds Qm* Supply of Loanable Funds SLF 1 I 1 Qm1AggregateDemand/Aggregate Supply Less than Full-Employment/Recession: AggregateDemand/Aggregate Supply Less than Full-Employment/Recession Price Level Gross Domestic Product (Fe) Y(f) (AS) P1 (AD) P* Y* AD1 At Y* the economy is at less than full-employment. With the increase in the Money Supply the interest rate decreases. This prompts consumers (C), businesses (I) and Government (G), to borrow more money. This money will be spent on Goods and Services somewhere in the economy. Consumption, Investment and possibly Government spending will increase. The value of the dollar will decrease (depreciate). Exports will increase. This will cause the Aggregate Demand curve to shift to the right toward Full-employment. This is called EXPANSIONARY (Loose) monetary policy. C I G therefore AD and unemployment Inflation What can the Federal Reserve do?: Inflation What can the Federal Reserve do? Sell Bonds (Securities) –Most likely Raise the Reserve Requirement Raise the Discount RateSelling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will take money out of the banking system. Supply of funds available in the banking system will DECREASE!!: Selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will take money out of the banking system. Supply of funds available in the banking system will DECREASE!! Interest Rate Money Supply I* Qm* Qm1 I1 MS* MS1 DM* The Federal Reserve Controls the Money Supply, which determines The Interest RateSlide9: Quantity of Bonds Supply of Bonds Pb* Qb* The Bond (Securities) Market Demand for Bonds Price of Bonds When the Fed sells bonds, they put bonds into the Bond Market. This Increases the Supply of Bonds. The Price of Bonds varies INVERSELY with Interest Rate. As the Price of Bonds go down, the Interest rate on the bonds goes up. Most interest rates charged to C, I and or G are link to bond prices. Qb1 Pb1 Sb1The Fed selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will decrease the money available to the banking system . The Supply of funds to be loaned out will DECREASE!!: The Fed selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will decrease the money available to the banking system . The Supply of funds to be loaned out will DECREASE!! Interest Rate Market for Loanable Funds I* Demand for Loanable Funds Qm* Supply of Loanable Funds I 1 Qm1 SLF1AggregateDemand/Aggregate Supply Presence of INFLATION: AggregateDemand/Aggregate Supply Presence of INFLATION Price Level Gross Domestic Product (Fe) Y(f) (AS) P1 (AD) P* Y* AD1 At Y* the economy is experiencing INFLATION. With the decrease in the Money Supply the interest rate INCREASES. This prompts consumers (C), businesses (I) and Government (G), to borrow LESS money. The value of the dollar will increase (appreciate). Imports will increase. This will cause the Aggregate Demand curve to shift DOWN toward Full-employment. This is called CONTRACTIONARY (TIGHT) monetary policy C I G therefore AD and unemployment Interest Rate effect on the Exchange Rate: Interest Rate effect on the Exchange Rate Suppose the Interest Rate in U.S. is HIGHER relative to the Interest Rate in the Rest of the World. Foreigners will want to invest in the U.S because they can get a higher interest rate. U.S Financial Assets will be more desirable. To do this they will need U.S. dollars. Supply of the Foreign Currency in the currency market will INCREASE as Foreigners give up their currency and increase their DEMAND for U.S. Dollars. Slide13: Market for Euros Dollar Price Per Euro $* €* Demand for Euros Supply of Euros Exchange Rate Quantity of Euros $1 €1 S€1Slide14: Quantity of Dollars Exchange Rate Market for Dollars Euro Price Per Dollar €* $* Demand for Dollars Supply of Dollars €1 $1 D$1What is the effect on the Exchange Rate?: What is the effect on the Exchange Rate? The Dollar price per Euro decreases (it becomes cheaper for us to buy) and the Euro Price per Dollar increases (it becomes more expensive for Europeans to buy dollars) The Dollar has APPRECIATED in value relative to the foreign currency. We can purchase more goods from the Europeans because the dollar buys more of their currency. What effect does the exchange rate between currencies have on Exports and/or Imports?: What effect does the exchange rate between currencies have on Exports and/or Imports? If the price of a dollar RISES relative to a foreign currency then it is said that the Dollar has APPRECIATED (gotten stronger) in value. The dollar can now purchase more of the foreign currency than it could before. Foreign goods are now less expensive because our dollars can purchase more of their goods. On the other hand, foreign currencies have DEPRECIATED in value relative to the dollar so our currency is more expensive to buy and our goods become relatively more expensive for foreigners to buy. IMPORTS WILL INCREASE AND EXPORTS WILL DECREASE WHEN THE DOLLAR DEPRECIATES IN VALUE RELATIVE TO OTHER CURRENCIES Interest Rate effect on the Exchange Rate: Interest Rate effect on the Exchange Rate Suppose the Interest Rate in U.S. is LOWER relative to the Interest Rate in the Rest of the World. Americans will want to invest in the country paying a higher interest rate. Financial Assets elsewhere will be more desirable. To do this they will need the foreign currency. Supply of U.S. Dollars in the currency market will INCREASE as Americans give up dollars and increase their DEMAND for the foreign currency. Slide18: Quantity of Dollars Exchange Rate €1 $1 S$1Slide19: Market for Euros Dollar Price Per Euro $* €* Demand for Euros Supply of Euros Exchange Rate Quantity of Euros $1 €1 D€1What is the effect on the Exchange Rate?: What is the effect on the Exchange Rate? The Dollar price per Euro increases (it becomes more expensive for us to buy) and the Euro Price per Dollar decreases (it becomes less expensive for Europeans to buy dollars) The Dollar has DEPRECIATED in value relative to the foreign currency. We can purchase fewer goods from the Europeans because the dollar buys less of their currency. What effect does the exchange rate between currencies have on Exports and/or Imports? : What effect does the exchange rate between currencies have on Exports and/or Imports? If the price of a dollar is LOWER relative to a foreign currency then it is said that the Dollar has DEPRECIATED (gotten weaker) in value. The dollar can now purchase less of the foreign currency than it could before. Foreign goods are now more expensive because our dollars can purchase less of their goods. On the other hand, foreign currencies have APPRECIATED in value relative to the dollar so our currency is less expensive to buy and our goods become relatively cheaper for foreigners to buy. IMPORTS WILL DECREASE AND EXPORTS WILL INCREASE WHEN THE DOLLAR DEPRECIATES IN VALUE RELATIVE TO OTHER CURRENCIES You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.
Unit4 MonetaryPolicy Summary Graphs Gulkund Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINTLite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: (To copy code, click on the text box) Embed: URL: Thumbnail: WordPress Embed Customize Embed The presentation is successfully added In Your Favorites. Views: 1890 Category: Education License: All Rights Reserved Like it (1) Dislike it (0) Added: April 13, 2008 This Presentation is Public Favorites: 2 Presentation Description No description available. Comments Posting comment... By: uzmesal (31 month(s) ago) i would like to request a download of this ppt. Saving..... Post Reply Close Saving..... Edit Comment Close By: uzmesal (31 month(s) ago) this presentation on MP is very informative, prescise and real good to develop basic concepts about the and impacts of MP. Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript Monetary Policy: Monetary Policy Effects on: Money Supply Bond Prices Interest Rates Exchange Rates Exports and Imports Aggregate DemandRecession or Less than Full-Employment What can the Federal Reserve do?: Recession or Less than Full-Employment What can the Federal Reserve do? Buy Bonds (Securities) –Most likely Lower the Reserve Requirement Lower the Discount RateBuying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will put more money into the banking system. Supply of funds available in the banking system will INCREASE!!: Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will put more money into the banking system. Supply of funds available in the banking system will INCREASE!! Nominal Interest Rate Money Supply I* Qm* Qm1 I1 MS* MS1 DM* The Federal Reserve Controls the Money Supply, which determines the Nominal Interest Rate in the Short-Term Money Markets Slide4: Quantity of Bonds Supply of Bonds Pb* Qb* The Bond (Securities) Market Demand for Bonds Price of Bonds When the Fed buys bonds, they take bonds out of the Bond Market. This Decreases the Supply of Bonds. The Price of Bonds varies INVERSELY with Interest Rate. As the Price of Bonds go up, the Interest rate on the bonds goes down. Most interest rates charged to C, I and or G are link to bond prices. Qb1 Pb1 Sb1The Fed Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will increase the money available to the banking system . The Supply of funds to be loaned out will INCREASE!! (The Market for Loanable Funds establishes the REAL Interest Rates (Long-Term Rates). : The Fed Buying bonds (securities), lowering the Reserve Requirement or lowering the Discount Rate, will increase the money available to the banking system . The Supply of funds to be loaned out will INCREASE!! (The Market for Loanable Funds establishes the REAL Interest Rates (Long-Term Rates). Real Interest Rate Market for Loanable Funds I* Demand for Loanable Funds Qm* Supply of Loanable Funds SLF 1 I 1 Qm1AggregateDemand/Aggregate Supply Less than Full-Employment/Recession: AggregateDemand/Aggregate Supply Less than Full-Employment/Recession Price Level Gross Domestic Product (Fe) Y(f) (AS) P1 (AD) P* Y* AD1 At Y* the economy is at less than full-employment. With the increase in the Money Supply the interest rate decreases. This prompts consumers (C), businesses (I) and Government (G), to borrow more money. This money will be spent on Goods and Services somewhere in the economy. Consumption, Investment and possibly Government spending will increase. The value of the dollar will decrease (depreciate). Exports will increase. This will cause the Aggregate Demand curve to shift to the right toward Full-employment. This is called EXPANSIONARY (Loose) monetary policy. C I G therefore AD and unemployment Inflation What can the Federal Reserve do?: Inflation What can the Federal Reserve do? Sell Bonds (Securities) –Most likely Raise the Reserve Requirement Raise the Discount RateSelling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will take money out of the banking system. Supply of funds available in the banking system will DECREASE!!: Selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will take money out of the banking system. Supply of funds available in the banking system will DECREASE!! Interest Rate Money Supply I* Qm* Qm1 I1 MS* MS1 DM* The Federal Reserve Controls the Money Supply, which determines The Interest RateSlide9: Quantity of Bonds Supply of Bonds Pb* Qb* The Bond (Securities) Market Demand for Bonds Price of Bonds When the Fed sells bonds, they put bonds into the Bond Market. This Increases the Supply of Bonds. The Price of Bonds varies INVERSELY with Interest Rate. As the Price of Bonds go down, the Interest rate on the bonds goes up. Most interest rates charged to C, I and or G are link to bond prices. Qb1 Pb1 Sb1The Fed selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will decrease the money available to the banking system . The Supply of funds to be loaned out will DECREASE!!: The Fed selling bonds (securities), Raising the Reserve Requirement or Raising the Discount Rate, will decrease the money available to the banking system . The Supply of funds to be loaned out will DECREASE!! Interest Rate Market for Loanable Funds I* Demand for Loanable Funds Qm* Supply of Loanable Funds I 1 Qm1 SLF1AggregateDemand/Aggregate Supply Presence of INFLATION: AggregateDemand/Aggregate Supply Presence of INFLATION Price Level Gross Domestic Product (Fe) Y(f) (AS) P1 (AD) P* Y* AD1 At Y* the economy is experiencing INFLATION. With the decrease in the Money Supply the interest rate INCREASES. This prompts consumers (C), businesses (I) and Government (G), to borrow LESS money. The value of the dollar will increase (appreciate). Imports will increase. This will cause the Aggregate Demand curve to shift DOWN toward Full-employment. This is called CONTRACTIONARY (TIGHT) monetary policy C I G therefore AD and unemployment Interest Rate effect on the Exchange Rate: Interest Rate effect on the Exchange Rate Suppose the Interest Rate in U.S. is HIGHER relative to the Interest Rate in the Rest of the World. Foreigners will want to invest in the U.S because they can get a higher interest rate. U.S Financial Assets will be more desirable. To do this they will need U.S. dollars. Supply of the Foreign Currency in the currency market will INCREASE as Foreigners give up their currency and increase their DEMAND for U.S. Dollars. Slide13: Market for Euros Dollar Price Per Euro $* €* Demand for Euros Supply of Euros Exchange Rate Quantity of Euros $1 €1 S€1Slide14: Quantity of Dollars Exchange Rate Market for Dollars Euro Price Per Dollar €* $* Demand for Dollars Supply of Dollars €1 $1 D$1What is the effect on the Exchange Rate?: What is the effect on the Exchange Rate? The Dollar price per Euro decreases (it becomes cheaper for us to buy) and the Euro Price per Dollar increases (it becomes more expensive for Europeans to buy dollars) The Dollar has APPRECIATED in value relative to the foreign currency. We can purchase more goods from the Europeans because the dollar buys more of their currency. What effect does the exchange rate between currencies have on Exports and/or Imports?: What effect does the exchange rate between currencies have on Exports and/or Imports? If the price of a dollar RISES relative to a foreign currency then it is said that the Dollar has APPRECIATED (gotten stronger) in value. The dollar can now purchase more of the foreign currency than it could before. Foreign goods are now less expensive because our dollars can purchase more of their goods. On the other hand, foreign currencies have DEPRECIATED in value relative to the dollar so our currency is more expensive to buy and our goods become relatively more expensive for foreigners to buy. IMPORTS WILL INCREASE AND EXPORTS WILL DECREASE WHEN THE DOLLAR DEPRECIATES IN VALUE RELATIVE TO OTHER CURRENCIES Interest Rate effect on the Exchange Rate: Interest Rate effect on the Exchange Rate Suppose the Interest Rate in U.S. is LOWER relative to the Interest Rate in the Rest of the World. Americans will want to invest in the country paying a higher interest rate. Financial Assets elsewhere will be more desirable. To do this they will need the foreign currency. Supply of U.S. Dollars in the currency market will INCREASE as Americans give up dollars and increase their DEMAND for the foreign currency. Slide18: Quantity of Dollars Exchange Rate €1 $1 S$1Slide19: Market for Euros Dollar Price Per Euro $* €* Demand for Euros Supply of Euros Exchange Rate Quantity of Euros $1 €1 D€1What is the effect on the Exchange Rate?: What is the effect on the Exchange Rate? The Dollar price per Euro increases (it becomes more expensive for us to buy) and the Euro Price per Dollar decreases (it becomes less expensive for Europeans to buy dollars) The Dollar has DEPRECIATED in value relative to the foreign currency. We can purchase fewer goods from the Europeans because the dollar buys less of their currency. What effect does the exchange rate between currencies have on Exports and/or Imports? : What effect does the exchange rate between currencies have on Exports and/or Imports? If the price of a dollar is LOWER relative to a foreign currency then it is said that the Dollar has DEPRECIATED (gotten weaker) in value. The dollar can now purchase less of the foreign currency than it could before. Foreign goods are now more expensive because our dollars can purchase less of their goods. On the other hand, foreign currencies have APPRECIATED in value relative to the dollar so our currency is less expensive to buy and our goods become relatively cheaper for foreigners to buy. IMPORTS WILL DECREASE AND EXPORTS WILL INCREASE WHEN THE DOLLAR DEPRECIATES IN VALUE RELATIVE TO OTHER CURRENCIES