Primary Monetary Policy Tools

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Presentation transcript:

Primary Monetary Policy Tools Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster College

Primary Monetary Policy Tools Open Market Sale In normal mode with id = 3% and the target iff = 2%, the equilibrium quantity of reserves equals $28b The Fed announces it will raise the target federal funds rate to 3% It does this by selling $1b worth of bonds to banks Since the Fed sets id one pct. point higher than its target, it announces id is now 4%. Federal Funds Market iff 27 3 SR 2 DR 28 R

Primary Monetary Policy Tools Open Market Sale With $1b fewer bonds in the banking system, MS decreases by $10b (= 1 × m) via decreased lending, and the nominal rate rises to 5.03% If inflation remains unchanged, r will rise by 1.18 pct. points. Market for money i MS 490 5.03 3.85 MD 500 M

Primary Monetary Policy Tools Open Market Sale In the Aggregate Market Model, if r rises by 1.18 pct. points, AD decreases u rises to un, Real GDP falls down to its potential level, and the price level falls to 225 Aggregate Market Model PL LRAS 225 SRAS 265 AD 15 16 Y