1. 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!

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!

4. DIRECT? INVERSE?

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

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

7. Inflation Targeting WWhere do countries often try to keep inflation? AAround 2%

8.  ___________ IN NET EXPORTS? WHY? EXPANSIONARY FISCAL EASY MONEY HOW CAN FISCAL AND MONETARY POLICIES AFFECT NET EXPORTS? DECREASEINCREASE 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 Gov’t spending has what effect on investment spending & net exports?

9. Net Export Effect & Fiscal Policy

10. 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  AD – decreases Xn  AS – ?  Other countries experience economic growth  AD – increases Xn  AS – ?

11. Central Banks as…  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) Regulators of Commercial Banks I Regulators of Commercial Banks II (info from The Fed) Central banks are also supposed to protect the consumer!!!

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

13. 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.