Chapter 15 Monetary Policy   Please

I. The Demand for Money is that amount needed for transactions and for accumulation of assets and other needs. II. Monetary Policy is the regulation of the money supply to affect interest rates which affects economic activity. III. Types of Monetary Control  Quantitative:  affect the money supply: with required reserve, open-market operations, discount rate, term auction facility                                                       Qualitative: affect financial participation with moral suasion, margin requirements, consumer credit controls IV. Implementing Monetary Policy four Internet articles on difficulty of implementing monetary policy V. Effectiveness of Monetary Policy Strengths: speedy, flexible, less political pressure, works well controlling inflation but with pain                                                                Weaknesses easy doesn't spur enough growth, velocity adjusts to counter reserve changes VI. QE2 Keeps Money Loose Readings VII. Seven Review Videos Practice Quizzes

Tools FED Have Left Ben Bernanke on Negative interest rates Targeting longer-term rates Helicopter money A Large Balance Sheeeet? Test Help 1-2 pages per chapter Macro Test Review 1 Macro Test Review 2 Macro Test Review 3

I. The Demand for Money     A. Transaction D, Dt results because people hold money, often in a money market account,          to use as a medium of exchange.     B. Asset Demand, Da  results because people accumulate money, often held in an investment          account, to buy assets and other needs     C. The demand for money, Dm= Dt + Dt       D.  For more information visit Demand for money - Wiki

II. Monetary Policy   A. Monetary policy is the regulation of the money supply to          affect interest rates and economic activity.     B. It is part of, but not the focal point of Keynesian economics.     C. Objective is noninflationary full employment.     D. Affecting interest rates and to change investment thus  affecting economic          activity is one goal of the Fed.         1. Controlling reserve requirement may affect the money supply which       may affect interest rates             a. Reserve requirement is the amount of demand deposits that must be kept                 in cash with the Federal Reserve or in the bank.             b. Often expressed as a percent called the reserve ratio.             c. Excess reserve can be loaned as demand deposits.             d. Excess reserves determine the potential money supply (M1).        2. Changes interest rates change investment causing a change in AD which             changes economic activity.             a) Increasing the money supply may lower interest rates. increasing investment                 which increases AD which causes an increase in Real GDP.           b) Decreasing  the money supply may increase interest rates lowering investment                 which increases AD which causes an increase in Real GDP.             c) Inteive quiz on using monetary policy from reffonomics.com                 a. With Graphs                 b Without graphs        3. Dollar values on this page are representative of amounts prevalent during            the late 1990's (billions of dollars).

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E. Affecting the non-investment components of aggregate demand                        1. Lower interest rates also increase C, G, and XN                  a. Consumption increases as credit purchases become cheaper.                  b. Refinancing existing debt at lower interest rates by individuals, businesses,                      and governments frees funds for spending.                  c. Lower interest rates also decrease the international value of the dollar as investors                      buy (demand) other currencies to earn more interest. The lower dollar increases XN                      as U.S. goods are less expensive and foreign goods more expensive.              2. Higher interest rates have an opposite affect              3. Currency Exchange Rates and Economic Activity                  a. Value of a currency determines price of import and export goods                  b. Increase in money supply cause inflation lowering the value of currency                      making exports cheaper and imports more expensive.                  c. Exports increase as they are less expensive in real terms and imports                     decrease as conversion to yen makes Toyota's more expensive                  d. Readings                      1. A  strong dollar is always good except when it isn't. 1/24/15                      2. U.S government has a problem with a strong high valued dollar 2/5/15          F. Federal reserve balance sheet.               1. Assets are held in securities and loans to commercial banks.              2. Liabilities and net worth re the reserves of commercial banks, treasury deposits,                  federal reserve notes, and equity (accumulated profits).
III. Types of Monetary Controls         A. Quantitative affect the money supply.              1. Required Reserve Ratio                  a. Lowering the reserve ratio creates excess reserves which banks may loan                      as newly created money. This is expansionary.                  b. Raising the reserve ratio eliminates excess reserve so banks can not renew                      loans removing money and causing a contraction.              2. Open-market operations                  a. Buying and selling of U.S. government bonds by the Federal Reserve from banks                      or in the open market to change excess reserves thus affecting the supply of M1                      and interest rates is the primary tool.                  b. Buying bonds is expansionary.                      1) When buying from banks, the Federal Reserve pays with reserves providing                           excess reserves banks can loan as demand deposits.                      2) When buying in the open market, increased demand from the Federal Reserve                          pushes up prices sellers receive, lowering the effective interest sellers pay.                  c. Selling bonds contracts the economy.                  d. Review of Valuing bonds                      1) Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value                           of $10,000. Face value is called par value.                          a) A few years go by and you need money and one choice is to sell the bond.                          b) If interest rates on this type bond have gone down, people will be very anxious                               to buy, demand, will be high pushing price up and your will receive more than                               $10,000.                          c) If rate shave gone down, no one will give you $10,000, demand will be low,                               so if you need the money, you will sell for less, below par.                          d) You can hold for twenty years and get par and get the money some where else.                      2) Therefore, interest rates and bond values (prices) go in the opposite direction,                           if interest rates down, old bond price up because they are at the old higher rate.                      3) This is called the interest rate risk for bonds. Other risks have to do with issuer                           default and monetary inflation.                  e. Federal Open Market Committee  minutes make interesting reading.                  f.  It is the most powerful of the four tools.                  g. Historical Note on lender of last resort type actions before there was a central                       bank began in response to the Panic of 1837 (U.S. first great depression. source                    1.  "The Secretary of the Treasury, Salmon P. Chase, bought $13.5 million in                           National 5-20 bonds, but this tepid government response did little                           to calm the markets (Juglar 95)."   Tepid response would be used to describe                           FED actions during Great Recession.                    2. "The New York Clearing House had two tools at its disposal for combating                          banking panics and liquidity crises, in the form of loan certificates and reserve pooling."            3. Discount rate                a. This is the rate charged by the Federal Reserve for loans to member banks.                  b. It strongly affects the prime interest rate paid by a bank's best customers.                    1) Lower the rate to expand economy as interest rates decrease.                    2) Raise the rate to contract economy as interest rates increase.                    3) Another important interest rate is the federal funds rate which is the rate at which                        banks loan funds to each other.            4. Term Auction Facility               a. Initiated in 2007, it allows banks to add to their reserves at low rates.                b Done to increase bank liquidity which was low because of a loss in reserve                   caused by a housing crisis.         B. Qualitative controls affect the actions of market participants.              1. Moral suasion or jawboning                    a. This social pressure by influential people to encourage specific people to act in the public interest.                  b. It is used to influence public opinion and political attitudes.                  c. An example is when the Chairman of Board of Governors makes his                      Semiannual Report to Congress on the economy and monetary policy.              2. Margin Requirements, the down payment required on stocks which is now 50%, is seldom changed.              3. Consumer Credit Controls, on items such as credit cards, work so well it is seldom used.

4. The Federal Funds Rate          a. Most controllable interest rate                  b. Targeted by monetary policy                  c. It is the overnight interest rate banks with excess fed reserve charge                      each banks short of fed reserve to keep the system in balance.                  d. By controlling reserves, the fed controls this rate.                  e. This allows them some control over short-term rates.                  f. For more information visit Federal funds rate - Wikipedia                  g. Taylor rule affected by Fed's  QE policies. 2/3/14                      See A Taylor Rule for Public Debt                    C. Readings              1. The Brave New World of Monetary Policy SF FED explains                  policy change resulting from the Great Recession 6/6/12              2. The Post Keynesian View-of Monetary Policy 12/10/15

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IV Implementing Monetary Policy        A. Elements Of Monetary Policy Implementation Framework 1 of 4        B. Counterparties And Collateral Requirements Of Implementing Monetary Policy 2 of 4        C. How Do Central Bank Balance Sheets Change In Times Of Crisis Part 3 of 4        D. The Trouble With Macroeconomics centers on the failures of monetary policy

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