ECON 203 Lecture Notes - Lecture 9: Inflation Targeting, Deflation, Interest Rate

• School: University of Calgary
• Department: Economics
• Course: ECON 203
• Professor: Douglas Mc Klintock

Document Summary

Action the bofc takes to manage the m and interest rates to pursue macroeconomic policy goals. Four main policy goals to promote a well functioning economy: price stability. Variables that can directly influence and which in turn, affect the inflation rate. Increase in real gdp or price level will shift money demand right. John maynard keynes: theory of money demand (liquidity preference: hold money, hold bonds ->interest bearing assets. People want to hold money for 3 reasons: Transactions demand (mt) = f(pl, y) positive relationship. Precautionary demand (mp) = f(pl, y) positive relationship. Speculative demand (ms or msp) = f(r) negatively related: interest rate goes up, speculative demand goes up. Short term nominal interest rates is most relevant when conducting monetary policy because interest rates will be most affected by increases & decreases in money supply. With the exception of gov"t purchases: consumption. High interest rates make it more expensive for firms/households to borrow: decreases.