Quantity of Federal Funds Borrowed and Lent Federal Funds Rate 6 % Supply of Federal Funds Demand for Federal Funds E.

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Presentation transcript:

Quantity of Federal Funds Borrowed and Lent Federal Funds Rate 6 % Supply of Federal Funds Demand for Federal Funds E

Federal Funds Rate 6 % New Supply of Federal Funds Demand for Federal Funds E1E1 E0E0 5 % Original Supply of Federal Funds Quantity of Federal Funds Borrowed and Lent

Quantity of federal funds borrowed and lent Federal Funds Rate Demand for Federal Funds E1E1 E0E0 5 % Supply of Federal Funds Target Rate A B

Prime Rate Federal Funds Rate Interest Rate (%)

Intended Investment (II ) Interest rate (r ) II r0r0 II 0 II 1 r1r1

Intended Investment (II ) Interest rate (r ) II 0 II 1 r

45 Income Aggregate Demand and Output AD 1 (with new, lower interest rate, r 1 ) E1E1 E0E0 AD 0 (with old interest rate, r 0 ) Y1Y1 Y0Y0

Expansionary monetary policy Lowers interest rates Investment is encouraged Aggregate demand rises Equilibrium GDP rises

Federal Funds Rate (%)

Nonresidential Investment Residential Investment Private Fixed Investment (billions of 2000 dollars)

Intended Investment (II) Interest rate (r ) II 0 II 1 5% II 1 8% A B Original Target Rate New Target Rate II 0

Quantity of Bonds Price of Bonds (and interest rate) $ 100 (i = 5%) Supply of Bonds Demand for Bonds E

Quantity of Bonds Price of Bonds (and interest rate) $ 100 (i = 5%) Supply of Bonds Original Demand for Bonds E0E0 E1E1 $103 (i = 2%) New Demand for Bonds

3 month T-bill Federal Funds Rate Interest Rate (%)

Quantity of Money Interest Rate (i ) i0i0 Money Supply Money Demand E0E0 E1E1 i1i1

Interest Rate (%) Federal Funds Rate Nominal 30-Year Mortgage Rate Real 30-Year Mortgage Rate

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