ECN 204 Chapter Notes - Chapter 12: Open Market Operation, Keynesian Economics, Fiscal Policy

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Tools of monetary policy: bank rate (br) Mss = raise br: cash reserve ration (crr) Mss = raise crr: open market operations (omo) central bank buys/ sells government bonds. Mss = cb sells bonds: deposit switching (ds) Mss = cb switches govt deposits to banks. Mss = cb switched government from deposits to itself: moral suasion. Mss = cb encourages banks to lend. Mss = cb discourages banks to lend. Interest: price of money -> demand for money l1 or l2. > supply for money (controlled by cb) demand for money = l1 + l2 goals: find equilibrium interest rates. L1: transactions demand for money - day to day transactions income (y) (+) price level (p) (+) is autonomous to interest rate. L2: speculatives/ asset demand for money idle balances interest rates (roi) (-) equilibrium interest rates. If mss , roi , i , ae , gdp (by a multiple)

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