ECON 22060 Lecture Notes - Lecture 10: Open Market Operation, Loanable Funds, Money Supply

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emmagennaro

23 Jan 2019

School

Kent State University

Department

Economics

Course

ECON 22060

Professor

Curtis Reynolds

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Document Summary

Expansionary monetary policy: occurs when the central bank acts to increase the money supply, done through open market purchases: central bank buys bonds. Increased supply of funds lowers the interest rate, and firms take more loans. The real impacts of the monetary policy disappear. In the long run, monetary policy does not affect real gdp or unemployment. The only effect will be on the price level, a nominal variable. Why doesn"t monetary policy always work: diminished effects in the long run, expectations reducing the effects of policy, policy is limited if downturns are caused by as shifts rather than ad shifts. Long-run effects of monetary policy: micro level using our previous example: In the short run, monetary policy can increase business investment. If demand for the product increases, the business will stay open and complete. It is also possible that the store may not be able to afford the rising input prices and may close.

Related Questions

Changes in the quantity of money lead to real changes in the economy. If this is the case, why would the central bank ever stop increasing the money supply?

a. Increasing the money supply is not a politically popular action and may lead to leaders of the central bank not getting reelected

b. The government has rules in place on the maximum amount the money supply can be increased in a given fiscal year

c. Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive down the value of money.

d. The short-run benefits are outweighed by the short-run costs of increases in the money supply

e. Although there is a short-run incentive to increase the money supply, these effects wear off in the long run as prices adjust and then drive up the value of money

coralreindeer872

1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

interest rate rises; investment falls

interest rate rises; investment rises

interest rate falls; investment rises

interest rate falls; investment falls

2. The main goal of monetary policy is to shift

3. Which of the following is true regarding the effects of an expansionary monetary policy?

Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.

Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.

Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.

Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.

You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.

You, the owner of an airline company, sign a two-year contract for airline fuel.

You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

real GDP and price level.

price level and inflation rate.

unemployment rate and inflation rate.

unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.

The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.

Both the short-run and long-run Phillips curves are downward sloping.

Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?

Year	Actual Inflation rate
2010	0%
2011	0%
2012	3%
2013	3%
2014	6%
2015	6%

8. Which of the following can change relatively quickly in the short-run?

the price of a latte in a coffee shop

the salary of a finance professor

the rent paid for a store

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Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

ECON 22060 Lecture Notes - Lecture 10: Open Market Operation, Loanable Funds, Money Supply

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