1. Unit 4 The Federal Reserve and Monetary Policy Chapter 31 Monetary Policy

2. I. Demand of Money a)Curve shows relationship between quantity of money demanded and the interest rate.

3. II. Shifting the Demand Curve for Money a)Changes in Aggregate Price Level b)Changes in Real GDP c)Changes in Technology d)Changes in Institutions

6. III. Money and Interest Rates a)Liquidity preference model: Interest rates are determined by the supply and demand for money b)Money Supply Curve: shows how the quantity of money supplied varies with the interest rate.

12. IV. Monetary Policy in the Long Run a)Affect aggregate price level but not real GDP or the interest rate b)Monetary policy is ineffectual in the long run.

13. V. Showing the Effects of Monetary Policy Graphically a)Three related graphs: 1)Money Market 2)Investment Demand 3)AD/AS

19. #1. Reserve Requirement a)Fed can change how much money from deposits that banks must hold in vaults. Ben Bernanke

20. Remember the Money Multiplier What should the Fed do to the Reserve Requirement if there is a recession? What should the Fed do to the Reserve Requirement if there is inflation?

21. #2. The Discount Rate a)Interest rate the FED charges commercial banks to borrow from them. b)What should the FED do to the discount rate if there is a recession? c)What should the FED do to the discount rate if there is inflation?

22. #3. Open Market Operations a)The FED can buy or sell government bonds (securities). b)This is the most widely used monetary policy. c)To INCREASE MS FED should buy. d)To DECREASE MS FED should sell. e)Remember: Buy = BIG, Sell = small

23. Federal Funds Rate a)Rate banks charge one another for one-day loans of reserves. b)FED influences this rate through buying and selling of bonds.