Chapter 15 Section 2

1
Monetary Policy

• Chapter 15 Section 2

2
Objectives

• What type of monetary policy is used to reduce
  unemployment?
• What type of monetary policy is used to reduce
  inflation?
• How does monetary policy reduce unemployment and
  inflation?

3
Question

• What are the effects on the economy from
  changing the money supply?

4
What is Monetary Policy?

• Deliberate control of the money supply by the
• FED
• (Federal Reserve)

5
Types of Monetary Policy

• 1. Expansionary
• Increase in the money supply
• 2. Contractionary
• Decrease in the money supply

6
ExpansionaryMonetary Policy

• Objectives for the economy
• Increase total spending
• Reduce unemployment

7
Expansionary Monetary Policy and Unemployment

• How does this work?
• The FED increases the money supply ?
• Increase total spending ?
• Firms sell more products ?
• Hire more workers ?
• Reduce unemployment

8
Crowding out does not apply to monetary policy

• If the FED increases the money supply, no one has
  to spend less.
• There is simply more money to spend
• total spending increases.
• This results in lower unemployment.

9
ContractionaryMonetary Policy

• Objectives for the economy
• Decrease total spending
• Reduce inflation

10
Contractionary Monetary Policy and Inflation

• How does this work?
• The FED decreases the money supply by conducting
  an open-market sale ?
• Decrease total spending ?
• Firms begin to sell less ?
• Their inventories rise ?
• In order to get rid of surplus goods, firms must
  lower prices ?
• Reduce inflation

11
Monetary Policy and the Exchange Equation
M x V P x Q
?M ?V ?P ?Q
?M ?P ?Q - ?V

• FED computes the annual ?V and ?Q

• Then, set the ?P ZERO (0)

• Therefore, M can be set to affect the economy
  without increasing inflation

• Auto Pilot

12
Assessment

• What type of monetary policy is used to reduce
  unemployment?
• What type of monetary policy is used to reduce
  inflation?
• How does monetary policy reduce unemployment and
  inflation?

13

Summary

• Expansionary Monetary policy is used to reduce
• UNEMPLOYMENT.
• Contractionary monetary policy is used to reduce
• INFLATION.