ECN 203 Lecture Notes - Lecture 24: Federal Funds Rate, Bank Reserves, Aggregate Demand
Document Summary
Red line = size of the waiting and in ationary expectation premium. Interest rates are lower for short term loans because they have less risk. Lending in the short term = federal funds market (overnight loans between banks) = this increases nancial capital in the economy, shifting the both long and short term supply lines downward. Q1 = i (how much money is being borrowed for investment spending) Open market operation- in ation: fed sells bonds on open market, interest rates rise, federal funds rate as bank reserves contract, long-term rates rise as s shifts, investment spending (i) slows, aggregate demand shifts left- price decrease. S decreases = ad decreases to a more stable point. Policy tools: discount rate, member banks may borrow directly from fed through discount window, rate on borrowing from fed, used in emergency, lower discount rate = more loans to banks = stimulated economy.
