EC140 Lecture Notes - Lecture 16: Monetary Policy, Overnight Rate, Aggregate Demand

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6 Mar 2017

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How fast do input prices adjust, eliminating any gains from aggregate demand. One solution ignore the money supply and target interest rates directly. Agree to pay interest or lend money at a set interest rate determine the market interest rate. Difficult to know the slope/position of the money demand curve. Difficult to know when the money demand curve will shift. Difficult to control the money supply banks can change target reserve ratios. If the banks want to target the interest rate, it is easier to do so directly. If the bank targets the money supply, the interest rate will fluctuate. Targets the overnight interest rate: rate charged on loans between commercial banks. Announces a bank rate, 0. 25 percentage points above the overnight rate: offers to lend money to banks at this rate. Sets a deposit rate 0. 25 percentage points below the overnight rate: pays this rate on all deposits.

Related Questions

Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

skypanda530

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates:

a. lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand.

b. spending on consumer goods and services directly, which causes an increase in aggregate demand.

c. an increase in nominal GDP and a change in the price level, but no change in real GDP.

d. an increase in aggregate supply since the supply of money is part of aggregate supply.

azuregerbil469

Question 16 (3 points) An expansionary monetary policy by the Fed should lead to:

A decrease in investment and a decrease in aggregate demand. Leave investment unchanged but decrease aggregate demand.

An increase in investment and an increase in aggregate demand.

An increase in investment and a decrease in aggregate demand.

Question 17 (3 points) Federal Reserve policy may have little impact on aggregate demand if:

Exchange rates do not respond to a change in market interest rates.

Investment by firms fails to respond to lower interest rates.

Banks meet their reserve requirements.

People fail to spend the extra money they receive when the Fed cuts taxes.

Question 18 (3 points) A liquidity trap is said to exist when a change in monetary policy has no effect on:

The supply of government bonds.

The natural level of employment

Aggregate supply.

Interest rates.

Question 19 (3 points) Because of the problem of lags, monetary authorities should probably respond to conditions:

Expected to exist in the future.

Immediately as they arise.

In the recent past.

Based on past statistics.

amberbeaver601

EC140 Lecture Notes - Lecture 16: Monetary Policy, Overnight Rate, Aggregate Demand

EC140 Full Course Notes

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