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Monetary Policy Lecture 14
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Supply
and Demand for Money |
People hold money
Transaction
demand – people need money to buy goods and serves
Precautionary
demand – people hold money for uncertainty
Medical
emergency
Bail a relative
out of jail
Store of value –
people save money
Demand for money
As interest rate
increases, people hold less money
Deposit money
into banks to earn interest
A higher GDP
requires more money

Supply of money
Central bank
supplies money
Interest rate is
independent of the money supply

Market equilibrium
– interaction of supply and demand

Review –
interest rates and bond prices are inversely related


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Expansionary Monetary Policy |
Central bank
increases the money supply
Central bank buys
assets
The Fed usually
buys U.S. gov. securities
The Fed
“electronically” increases the bank deposits as it buys assets
“Fed” check


Interest rates
decrease
Expands GDP and
creates inflation
Note: U.S. dollar
depreciates relative to other currencies
Expansionary
monetary policy boost the economy
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The lower
interest rates
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Increases
business investment
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Households buy
more cars and houses
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Weaker U.S.
dollar boosts the export industries
Contractionary
monetary policy
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