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Monetary Policy, Real GDP, and the Price Level
Cause-effect chain:
Effects of expansionary monetary policy:
Recession/High UE-- Fed buys bonds/lowers reserve ratio/lowers discount rate => excess reserves increases / checkable deposits increase=>Federal funds falls => Money Supply increases => interest rate falls => Investment increases => Aggregate Demand increases (because investment is determinant of AD)=> Y rises, UE falls, PL rises.
Effects of a restrictive monetary policy:
Effects of expansionary monetary policy:
Recession/High UE-- Fed buys bonds/lowers reserve ratio/lowers discount rate => excess reserves increases / checkable deposits increase=>Federal funds falls => Money Supply increases => interest rate falls => Investment increases => Aggregate Demand increases (because investment is determinant of AD)=> Y rises, UE falls, PL rises.
Effects of a restrictive monetary policy:
Overheated Economy/Runaway Inflation-- Fed sells bonds, increase reserve ratio, increase discount rate => excess reserves decrease /checkable deposits decrease=>Federal funds increase => Money Supply decrease=> interest rate increase => Investment decrease=> Aggregate Demand decrease(because investment is determinant of AD)=>Y falls, UE rises, PL falls
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Robert.Wang |
Latest page update: made by Robert.Wang
, Mar 18 2008, 2:34 PM EDT
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Edited by Robert.Wang
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