ECO202Y5 Lecture Notes - Lecture 8: Monetary Policy, Exchange Rate, Money Supply
Document Summary
** there will be practice test questions posted online later this week in preparation for the midterm. Brief discussion of targeting interest rates (using is-lm) Monetary policy will adjust accordingly to achieve this target interest rate. Instead of having output and interest rate increase, the central bank will get involved and increase the money supply (shift right). This allows for the new output to exist at the same interest rate. The money supply will shift right until the equilibrium point is back to the original interest rate. With an upward sloping lm curve: output and interest will both increase. With a horizontal lm curve: output will increase but interest will stay constant i stays the same. No rise in i to offset investment. Generally speaking, does well in the short run (main casual relationships seem to hold) In chapter 6 we are going to do the following: A bit of accounting (connecting goods and financial markets)
