Student Notes 11:

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Rose-Hulman Institute of Technology Department of
Humanities Social Sciences / K. Christ SL 151,
Principles of Economics
Student Notes 11 Macroeconomic Policy, Part 1
-- Monetary Policy
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Expansionary monetary policy
Money Market
AD Effects
Price Level
Interest Rate
Aggregate Output
Summary
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Contractionary monetary policy
Money Market
AD Effects
Price Level
Interest Rate
Aggregate Output
Summary
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Central bank policy tools
Open market operations
1.
The buying and selling of government
bonds, through which a central bank can
quickly influence the money supply and
availability of credit.
Reserve requirements
2.
Regulations concerning the minimum amount of
reserves that banks must hold against deposits in
a fractional reserve banking system.
Discount rate
3.
The short-term interest rate on loans that a
central bank makes to commercial banks.
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Monetary policy Can policy makers control
inflation?
What causes inflation?
F
The Quantity Theory of Money Inflation is
purely a monetary phenomenon
MV PQ (equation of exchange) Growth in the
money supply, if greater than the growth rate of
real output, leads to rising prices
F
How can we control the money supply?
F
Federal Open Market Operations
Buying securities Increases the
money supply Selling securities
Decreases the money supply
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The quantity theory of money
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The quantity theory of money
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The classical dichotomy (and monetary
neutrality)
The classical dichotomy
1.
The theoretical separation of nominal and real
variables.
Monetary neutrality
2.
The proposition that changes in the money supply
do not affect real variables.
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Central bank open market operations
Expansionary (Loose) Monetary Policy
Contractionary (Tight) Monetary Policy
Central Bank sells securities from commercial
banks
Central Bank buys securities from commercial banks
Commercial banks excess reserves rise
Commercial banks excess reserves fall
Encouragement of New lending activity
Diminishment of lending activity
Nominal short-term interest rates fall
Nominal short-term interest rates rise
?
Increased Spending
Decreased Spending
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Recent Federal Reserve Monetary Policy
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Interest Rates, Real and Nominal
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Demand Pull Inflation
Price Level
Federal Open Market Committee, March 21,
2000 The Committee remains concerned that
increases in demand will continue to exceed the
growth in potential supply, which could foster
inflationary imbalances.
Aggregate Output
Full Employment Or Potential Output
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Demand Pull Inflation
Price Level
Federal Open Market Committee, August 22,
2000 Recent data have indicated that
expansion of aggregate demand is moderating
toward a pace closer to the rate of growth of
the economys potential to produce. . . . .
.rapid advances in productivity have been raising
that potential growth rate as well as containing
costs and holding down underlying price
pressures.
Aggregate Output
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Cost Push Inflation
Price Level
Federal Open Market Committee, October 3,
2000 . . . the increase in energy prices,
though having limited effect on core measures
of prices to date, poses a risk of raising
inflation expectations.
Aggregate Output
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Countercyclical Easing (Accommodation)
Price Level
Federal Open Market Committee, September 17,
2001 Even before the tragic events of last
week, employment, production, and business
spending remained weak, and last week's events
have the potential to damp spending further.
For the foreseeable future, the Committee
continues to believe that against the background
of its long-run goals of price stability and
sustainable economic growth and of the
information currently available, the risks are
weighted mainly toward conditions that may
generate economic weakness. .
Aggregate Output
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Recent FOMC Statements
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Recent FOMC Statements
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Recent FOMC Statements
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Recent FOMC Statements
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Recent FOMC Statements
June 25, 2003 The Federal Open Market Committee
decided today to lower its target for the federal
funds rate by 25 basis points to 1 percent. In a
related action, the Board of Governors approved a
25 basis point reduction in the discount rate to
2 percent. The Committee continues to believe
that an accommodative stance of monetary policy,
coupled with still robust underlying growth in
productivity, is providing important ongoing
support to economic activity. Recent signs point
to a firming in spending, markedly improved
financial conditions, and labor and product
markets that are stabilizing. The economy,
nonetheless, has yet to exhibit sustainable
growth. With inflationary expectations subdued,
the Committee judged that a slightly more
expansive monetary policy would add further
support for an economy which it expects to
improve over time. The Committee perceives that
the upside and downside risks to the attainment
of sustainable growth for the next few quarters
are roughly equal. In contrast, the probability,
though minor, of an unwelcome substantial fall in
inflation exceeds that of a pickup in inflation
from its already low level. On balance, the
Committee believes that the latter concern is
likely to predominate for the foreseeable future.
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Recent FOMC Statements
December 9, 2003 The Federal Open Market
Committee decided today to keep its target for
the federal funds rate at 1 percent. The
Committee continues to believe that an
accommodative stance of monetary policy, coupled
with robust underlying growth in productivity, is
providing important ongoing support to economic
activity. The evidence accumulated over the
intermeeting period confirms that output is
expanding briskly, and the labor market appears
to be improving modestly. Increases in core
consumer prices are muted and expected to remain
low. The Committee perceives that the upside and
downside risks to the attainment of sustainable
growth for the next few quarters are roughly
equal. The probability of an unwelcome fall in
inflation has diminished in recent months and now
appears almost equal to that of a rise in
inflation. However, with inflation quite low and
resource use slack, the Committee believes that
policy accommodation can be maintained for a
considerable period.
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Recent FOMC Statements
January 28, 2003 The Federal Open Market
Committee decided today to keep its target for
the federal funds rate at 1 percent. The
Committee continues to believe that an
accommodative stance of monetary policy, coupled
with robust underlying growth in productivity, is
providing important ongoing support to economic
activity. The evidence accumulated over the
intermeeting period confirms that output is
expanding briskly. Although new hiring remains
subdued, other indicators suggest an improvement
in the labor market. Increases in core consumer
prices are muted and expected to remain low.
The Committee perceives that the upside and
downside risks to the attainment of sustainable
growth for the next few quarters are roughly
equal. The probability of an unwelcome fall in
inflation has diminished in recent months and now
appears almost equal to that of a rise in
inflation. With inflation quite low and resource
use slack, the Committee believes that it can be
patient in removing its policy accommodation.
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Recent FOMC Statements
May 4, 2004 The Federal Open Market Committee
decided today to keep its target for the federal
funds rate at 1 percent. The Committee
continues to believe that an accommodative stance
of monetary policy, coupled with robust
underlying growth in productivity, is providing
important ongoing support to economic activity.
The evidence accumulated over the intermeeting
period indicates that output is continuing to
expand at a solid rate and hiring appears to have
picked up. Although incoming inflation data have
moved somewhat higher, long-term inflation
expectations appear to have remained well
contained. The Committee perceives the upside
and downside risks to the attainment of
sustainable growth for the next few quarters are
roughly equal. Similarly, the risks to the goal
of price stability have moved into balance. At
this juncture, with inflation low and resource
use slack, the Committee believes that policy
accommodation can be removed at a pace that is
likely to be measured.