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Chapter 13

Chapter 13 Economic Fluctuations Monetary Policy And The Financial System (Got A+ on the test)

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ECON 2035
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Chapter 13Economic Fluctuations Monetary Policy and the Financial System 131 MONETARY POLICY AND THE TERM STRUCTURE Term structure of interest rates Federal reserve can affect all interest rates in the economy because changes in the federal funds rate will affect other longterm interest ratesoit1nitEit1Eitn 1 n 1 1 1 nit current one period interest rate t days not years n Eit1expected value of the one period interest rate on period in the future etc1the term premium n the one month rate is the average expected federal funds rate over the month plus the term premium for the onemonth bond federal reserve can affect longterm interest rate by changingshortterm rates and then relying on traders to change their expectations on the level of future shortterm rates oexpectations play a major role in how effective a change in the federal funds rate is in changing longer rated Learning Tip change in the federal fnds rate by the federal reserve will have largest impact when move is completely unexpected When change in federal reserve rate is expected the federal reserves move will not have as large an impact on longerrates when the interest rate move is made 132 THE FINANCIAL SYSTEM AND AGGREGATE EXPENDITURE changes in asset prices will lead to changes in AEchanges in aggregate output LeadtochangesinaggregateexpenditureoChangesinvalueofassetsleadtochangeinwealthcauseschangesinthelevelofconsumptionexpenditureAssetpricesincreasewealthincreaseconsumptionincreaseAEoChange in wealth change in the amount of collateral that can be offered to take out loanseffect investment expenditureAssetpricesincreaseAbilityforhouseholdstogetloa
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