1. A few key ideas – pairs edition
Monetary policy
A few key ideas – pairs edition

2. Interest Rate…Yes or No?
Investment
Do businesses invest more when the interest rate is high?
No!
Bonds
Do people demand more bonds when the interest rate is high?
Yes!
Does an increase in the interest rate help bond owners?
No! (It helps bond BUYERS though)

3. Interest Rate…Yes or No?
Investment
Do businesses invest more when the interest rate is high?
No!
Bonds
Do people demand more bonds when the interest rate is high?
Yes
Does an increase in the interest rate help bond owners?
No! (It helps bond BUYERS though)

4. What is the interest rate’s relationship
to the inflation rate?
DIRECT? INVERSE?

5. But…it’s not always that simple (look @ inflation v
But…it’s not always that simple inflation v. interest rates graphs)

6. 3 Tools of Monetary Policy
Reserve requirement (RR) - The % that banks must hold in reserve and cannot loan out. The RR is 10% in the US.
To increase money supply, __________RR. (increase or decrease?)
To decrease money supply, __________ RR.
Discount rate (DR) - The interest rate that the central bank charges commercial banks.
To increase money supply, __________ DR.
To decrease money supply, __________ DR.
Open Market Operations (OMO) - When the central bank buys or sells bonds (treasuries) in the open market.
To increase money supply, they should __________ bonds.
To decrease money supply, they should __________ bonds.
To fix a recessionary gap, a central bank should ____ the money supply.

7. MONETARY Policy Effects

8. RECAP: THE TWO MULTIPLIERS
KEYNESIAN MULTIPLIER
MONEY MULTIPLIER
(1-MPC) = ???
Which is more associated with fiscal policy?
Which is more associated with monetary policy?

9. The Money Multiplier (Based on a 10% Reserve Requirement)

10. Inflation Targeting Where do countries often try to keep inflation?
Around 2%

11. HOW CAN FISCAL AND MONETARY POLICIES AFFECT NET EXPORTS?
EXPANSIONARY FISCAL
EASY MONEY
___________ IN NET EXPORTS? WHY?
___________ IN NET EXPORTS? WHY?
Gov’t spending has what effect on investment spending & net exports?
DECREASE
INCREASE
Consider:
(1) affects on supply/demand for money
(2) change in interest rates
(3) foreign demand for money
(4) currency appreciation/depreciation
(5) affect on Xn

12. Net Export Effect & FISCAL Policy

13. Review: How would each of these affect Australia’s economy? (AD & AS)
Australia’s currency strengthens in value compared to Euro
AD – decreases Xn
AS – could increase
Australia’s currency weakens in value compared to Euro
AD – increases Xn
AS – could decrease
Other countries experience a recession
AS – ?
Other countries experience economic growth

14. Central banks are also supposed to protect the consumer!!!
Central Banks as…
Regulators of Commercial Banks I
Regulators of Commercial
Banks II (info from The Fed)
CAMELS (for banks)
Condition (capital adequacy)
Asset quality
Management
Earnings
Liquidity
Sensitivity to Market Risk
5 Cs (from sample size of borrowers)
Capacity (borrower’s ability to pay)
Collateral (if borrower doesn’t pay)
Condition (borrower’s circumstances…how much $ is expected to come in)
Capital (do borrower’s liabilities outweigh assets?)
Character (borrower’s payment history/credit report)
Central banks are also supposed to protect the consumer!!!

15. Central Banks as… Bankers to governments!
Holding/investing money used for government operations (collected through taxes)
Selling government securities (raises money for gov’t)

16. And finally…
A definition of Interest (Thanks Wikipedia!)
A fee paid by a borrower of assets to the owner as a compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money or money earned by deposited funds.