BUDGET FUN!  Federal.budgetchallenge.org/pages/overview Time to take a budget challenge!  Go to the Congressional Budget Office page, under “Topics”, pick a topic you and your partner would like to read.  Chose ONE article and outline some of the findings of the CBO.  WRITE DOWN 2-3 questions your article has raised and be prepared to discuss!  Be ready to present your findings to class

Monetary Policy and the Interest Rate Module 31

Monetary Policy and Interest Rate  Review!  MM and LFM  Short Run – r determined by MM  Long Run – r is determined by the supply and demand of LF that arise when GDP is at full potential

Monetary Policy and Aggregate Demand  Monetary Policies and the r  Federal Funds Rate  The Fed sets a target FFR  Impacts the money supply  Open market operations are preferred by the Fed  Currently: 0%-0.25%  Expansionary and Contractionary Monetary Policies

Monetary Policy in Practice  Monetary Policy that shifts the AD curve right:  Fed expands money supply  Rates drop  More investment spending  Leads to I rGDP  I consumer spending  EXPANSIONARY!

Monetary Policies in Practice  Money supply is contracted:  Fed contracts money supply  Leads to I investment rates  I investment spending  I rGDP  I consumer spending  Part of the Fed’s dual mandate is price (inflation) control  Taylor Rule for Monetary Policy  Set FFR to account for inflation rates and output gaps:  FFR = 1 + (1.5 x infl. Rate) + (0.5 x OG) c c c c c c

Taylor Rule Continued  Taylor Rule  Predicts what Fed SHOULD do  Very good at predicting Fed behavior for economics  Accounts for inflation and output gap issues  Inflation Targets  Fed’s mandate keep inflation low but no set rate is preferred  Inflation Target – the rate the central bank wants to achieve  Forward looking  Taylor Rule looks back at past inflation rate for policy decisions  Helps with transparency for the public

Monetary Policy and Interest Rates  Monetary/fiscal policy failures  Over-borrowing (debt/deficit)  Causes crowding out, implications for future debt  Austerity – drastic cuts in social programs  Inflation, Hyperinflation, Seigniorage  Money supply disruption  Results:  Poverty, social conflict, political classes, inflationary issues, loss of FDI/borrowing power

Monetary Policy and Interest Rates  Regulations  Regulatory powers reside in multiple agencies:  FED  SEC  Treasury Department  No major reform after 2008 collapse, however some changes:  Stress tests  Dodd-Frank Bill  Still in flux

Money, Output, and and Prices in the Long Run Module 32

Money, Output, and Prices  Monetary policy action (not Fiscal) is the usual tool of choice for economic stabilization  But – can a central bank make inappropriate decisions regarding expansionary/contractionary policy?  In the long-run, the economy self corrects, so is correct policy an issue  YES, it still can cause mass changes in the short run

Effects of an Increase in the Money Supply  In SR in increase in MS pushes AD right (lower rates = increased consumer spending, investment  But y 2 is above Y P so in the LR, nominal wages will rise, increases SRAs until it gets to SRAS 2, or equilibrium  In the end, APL increases

Monetary Neutrality  So changes in MS can affect APL  Changes are directly linked  If there is a 25% change in MS, APL falls 25% in LR  Exactly proportional  This is known as money neutrality  rGDP and the “value” of money does not change

Changes in the Money Supply and the Interest Rate in the Long-Run  Lessons?  The Fed functions as a SR economic stabilizer, in the LR, gaps, wages, self- correction  In the LR, changes in MS do NOT affect the money supply at all

Poster Sessions  You will choose an economics concept from Mods 33 or 34 (draw straws!)  Use a laptop, your book, or another text to explore your concept.  Use your creativity to provide visual and informational components to a “poster”  Hang your poster!  Walk throughout the classroom and take notes, ask questions, and provide feedback to the authors!

6/7 th Groups

10 th groups