warm up what is the interest rate on currency?. current events press release release date: january...

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  • Slide 1
  • Warm Up What is the interest rate on currency?
  • Slide 2
  • Current Events Press Release Release Date: January 29, 2014 For immediate release Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
  • Slide 3
  • Poster Creation Requirement Problem: The Fed wants to increase the money supply. Decision: How should you accomplish this? What tools did you choose? Why? Create a poster to advertise for the Feds choice (your choice) on how to increase the monetary policy and include three arguments why people should be accepting of this choice Include a nonlinguistic representation and an overview of who the Fed is
  • Slide 4
  • Warm Up Imagine life without ATMs and Cashback. Do you think people would hold more or less cash? Why
  • Slide 5
  • Warm Up: IF THE FED WANTS TO
  • Slide 6
  • Today, we will visit the money market!
  • Slide 7
  • Module 28:The Money Market (Supply and Demand for Money) 7
  • Slide 8
  • Review: M1: money in circulation; checking M2: M1 plus deposits easily transferred into checkable deposits
  • Slide 9
  • DRAW A MONEY MARKET MODEL
  • Slide 10
  • Why hold cash? -cash only -Forgot lunch -Borrow money -Bake sale -Emergencies -Lost job -Health problems
  • Slide 11
  • What is the Opportunity cost of holding money?
  • Slide 12
  • The higher the short- term interest rate, the higher the opportunity cost of holding money and vice versa
  • Slide 13
  • The Money Demand curve slopes down and to the right because, all else being equal, higher interest rates increase the opportunity cost of holding money, thus leading public to reduce quantity of money it demands
  • Slide 14
  • Why interest rates instead of other investments such as stocks or real estate? Looking for liquid investments (things we can easily change into cash if needed. (Certificate of deposit)
  • Slide 15
  • Money Demand Curve Shifters 1.Changes in Aggregate Price Level 2.Changes in Real GDP 3.Changes in Technology 4.Changes in Institutions
  • Slide 16
  • Nominal Interest Rate (ir) Quantity of Money (billions of dollars) 20% 5% 2% 0 D Money Inverse relationship between interest rates and the quantity of money demanded 16 The Demand for Money
  • Slide 17
  • Quantity of Money (billions of dollars) 20% 5% 2% 0 D Money What happens if price level increase? 17 The Demand for Money D Money1 Money Demand Shifters 1.Changes in aggregate price level 2.Changes in real GDP (income) 3.Changes in technology (ATMs) 4.Changes in institutions Nominal Interest Rate (ir)
  • Slide 18
  • Federal funds rate moves with CDs (because both reflect short term interest rates) The Fed: carrying out the open market operations 1.Achieve a target federal funds rate 2.Affect interest rates
  • Slide 19
  • The Equilibrium Interest Rate Liquidity Preference Model of the interest Rate
  • Slide 20
  • If the FED increases the money supply, a temporary surplus of money will occur at 5% interest. The surplus will cause the interest rate to fall to 2% Increasing the Money Supply Increase money supply Decreases interest rate Increases investment Increases AD 20 200 DMDM SMSM 10% 5% 2% Quantity of Money (billions of dollars) Interest Rate (ir) How does this affect AD? 250 S M1
  • Slide 21
  • If the FED decreases the money supply, a temporary shortage of money will occur at 5% interest. The shortage will cause the interest rate to rise to 10% Decreasing the Money Supply Decrease money supply Increase interest rate Decrease investment Decrease AD 21 200 DMDM SMSM 10% 5% 2% Quantity of Money (billions of dollars) Interest Rate (ir) How does this affect AD? 150 S M1
  • Slide 22
  • The Money Demand curve slopes down and to the right because, all else being equal, higher interest rates increase the opportunity cost of holding money, thus leading public to reduce quantity of money it demands
  • Slide 23
  • Factors that can cause the MD Curve to shift Changes in Aggregate Prices Changes in Real GDP Changes in banking technology (ex: ATMs) Changes in Banking Institution Regulations
  • Slide 24
  • Slide 25
  • AS the Credit Crisis got worse between 2007 and 2008 the Fed lowered interest rates hoping to increase liquidity in the market place and help pull the nation out of a recession. This is reflected in the lower interest rates banks were willing to pay on deposits.
  • Slide 26
  • The Equilibrium Interest Rate The Equilibrium Interest Rate Liquidity Preference Model of the Interest Rate (rates are determined by supply and demand of money) Equilibrium interest rate is rate where quantity demanded equals quantity supplied
  • Slide 27
  • 2007B Practice FRQ: Just Do the Graph for (b) 27
  • Slide 28
  • 2007B Practice FRQ 28
  • Slide 29
  • Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded 1. What happens to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities 2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increases. There is no incentive to convert cash into interest earning assets 29
  • Slide 30
  • 30 The role of the Fed is to take away the punch bowl just as the party gets going

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