1. Module 27 & 28 & 29 27. The Federal Reserve Monetary Policy
28. The Money Market
29. The Market for Loanable Funds

2. Module 27: The Federal Reserve - Monetary Policy
Functions of the Federal Reserve
Provide Financial Services
Supervise and Regulate Banking Institutions
Maintain the Stability of the Financial System
Conduct Monetary Policy
What is Monetary Policy?

3. Module 27: The Federal Reserve - Monetary Policy
What does the Fed do?
The Reserve Requirement
Federal Funds Market - financial market that allows banks that fall short of the RR to borrow reserves from banks holding excess reserves
Federal Funds Rate - interest rate at which funds are borrowed and lent in the FFM

4. Module 27 The Discount Rate
Interest rate the FED charges on loans that banks borrowed from the FED
Usually 1% above FFR to discourage banks from going to FED
To alter money supply, FED can change Discount Rate
Changes in money supply
Reduce spread b/w FFR and Discount rate = increase money supply
Increase spread b/w FFR and DR = lower money supply

5. Module 27 Open-Market Operation
The FED buys and sells US Treasury bills through commercial banks
Buys
FED buying increases monetary base b/c it increases bank reserves
Sells
FED selling decreases monetary base b/c it decreases bank reserves
Money Multiplier
The OMO doesn’t affect the money supply directly, instead it starts the money multiplier.

6. Module 28 - The Money Market
The Opportunity Cost of Holding Money
When someone decides to hold money instead of other assets, they are giving up the interest they could be earning while holding other assets.
The Money Demand curve
Illustrates relationship between the interest rate and the quantity of money demanded.
Slopes downward: Higher interest rate = higher opportunity cost of holding money and reduced quantity of money demanded.
Ex. If interest rates are low, people will hold money because it’s not losing out on much.
If interest rates are high, they could be making a profit by loaning it out.

7. Module 28 - The Money Market
Shifts of the Money Demand Curve
Changes in Aggregate Price Level
People carry more cash now b/c things cost more and they want to be able to buy it immediately.
Increased inflation would shift the curve right bc more money would be needed to purchase the same good.
Changes in Real GDP
Increase in REAL GDP = shifts right
Changes in Technology
Cards = money w/out a bank visit
Changes in Institutions
If banks offer interest rates on checking accounts, demand for money will increase

8. The Demand for Money

9. Module 29 - The Market for Loanable Funds
Loanable Funds Market
A market with people who want to lend money (savers) and those who want to borrow money (firms with investment spending projects).
The price that is determined in the market is the interest rate (r)

10. Module 29 - Supply of Loanable Funds

11. Module 29
Rate of Return =
Revenue from project - Cost of Project / Cost of project X 100
A business will want to loan when the rate of return on its project is greater than or equal to the interest rate
The Supply of loanable funds curve will shift right if private savings increases.
If government deficit increases, and trade deficit increases, this will increase the demand and increase the supply of loanable funds in the domestic market. (Page 280)

12. Module 29
Questions.
If the nominal interest rate is 5% and the inflation rate is 1%, what is the real interest rate?
If the real interest rate is 6% and the inflation rate is 3%, what is the nominal interest rate?
If the nominal interest rate is 10% and the real interest rate is 6%, what is the rate of inflation?