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

2. Federal Funds Market 28R i ff SRSR 2 DRDR 3 Open Market Purchase – In normal mode with i d = 3% and the target i ff = 2%, the equilibrium quantity of reserves equals $28b Primary Monetary Policy Tools

3. Federal Funds Market 28R i ff 2 DRDR 1.5 3 Open Market Purchase – In normal mode with i d = 3% and the target i ff = 2%, the equilibrium quantity of reserves equals $28b – The Fed announces it will lower the target federal funds rate to 1.5% Primary Monetary Policy Tools SRSR

4. Federal Funds Market 28R i ff 2 DRDR 28.5 3 Open Market Purchase – In normal mode with i d = 3% and the target i ff = 2%, the equilibrium quantity of reserves equals $28b – The Fed announces it will lower the target federal funds rate to 1.5% – It does this by buying $0.5b worth of bonds from banks Primary Monetary Policy Tools 1.5 SRSR

5. Federal Funds Market 28R i ff SRSR DRDR 28.5 Open Market Purchase – In normal mode with i d = 3% and the target i ff = 2%, the equilibrium quantity of reserves equals $28b – The Fed announces it will lower the target federal funds rate to 1.5% – It does this by buying $0.5b worth of bonds from banks – Since the Fed sets i d one pct. point higher than its target, it announces i d is now 3.5%. Primary Monetary Policy Tools 28.5 1.5 2.5

6. 500 3.85 MS MD Open Market Purchase – With $0.5b more bonds in the banking system, Primary Monetary Policy Tools Market for money M i

7. 500 3.85 MS MD 505 Open Market Purchase – With $0.5b more bonds in the banking system, MS increases by $5b (= 0.5 × m) via increased lending Primary Monetary Policy Tools Market for money M i

8. 500 3.85 MS MD 505 2.85 Open Market Purchase – With $0.5b more bonds in the banking system, MS increases by $5b (= 0.5 × m) via increased lending, and the nominal rate falls to 2.75% Primary Monetary Policy Tools Market for money M i

9. 500 3.85 MS MD 505 2.85 Open Market Purchase – With $0.5b more bonds in the banking system, MS increases by $5b (= 0.5 × m) via increased lending, and the nominal rate falls to 2.75% – If inflation remains unchanged, r will fall by 1 pct. point Primary Monetary Policy Tools Market for money M i

10. Open Market Purchase – In the Aggregate Market Model, if r will falls by 1 pct. point, AD increases Primary Monetary Policy Tools Aggregate Market Model 1415 AD 215 SRAS LRAS Y PL

11. Open Market Purchase – In the Aggregate Market Model, if r will falls by 1 pct. point, AD increases – u equals u n Primary Monetary Policy Tools Aggregate Market Model 1415 AD 215 SRAS LRAS Y PL

12. Open Market Purchase – In the Aggregate Market Model, if r will falls by 1 pct. point, AD increases – u equals u n, Real GDP rises to its potential Primary Monetary Policy Tools Aggregate Market Model 1415 AD 215 SRAS LRAS Y PL