CHAPTER 3 THE FED AND INTEREST RATES
Recall that the monetary base comprises the Fed’s 2 largest liabilities: Copyright© 2006 John Wiley & Sons, Inc. 2
Definitions of money Copyright© 2006 John Wiley & Sons, Inc. 3
The money supply involves the Monetary Aggregates Copyright© 2006 John Wiley & Sons, Inc. 4
The Fed controls the monetary base…. Copyright© 2006 John Wiley & Sons, Inc. 5
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…Thus the Fed controls the money supply…. 7
FED Funds Market Copyright© 2006 John Wiley & Sons, Inc. 8
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As Fed adjusts tools of monetary policy, reserve effects influence Fed Funds rate significantly in short run Copyright© 2006 John Wiley & Sons, Inc. 14
Fed cannot set Fed Funds rate in long run Copyright© 2006 John Wiley & Sons, Inc. 15
The Importance of the fed funds rate Copyright© 2006 John Wiley & Sons, Inc. 16
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6 basic goals of monetary policy, set by the Humphrey-Hawkins Act of 1978 Copyright© 2006 John Wiley & Sons, Inc. 20
1. Full employment Copyright© 2006 John Wiley & Sons, Inc. 21
2. Economic Growth Copyright© 2006 John Wiley & Sons, Inc. 22
3. Price Stability Copyright© 2006 John Wiley & Sons, Inc. 23
4. Interest rate Stability Copyright© 2006 John Wiley & Sons, Inc. 24
5. Stability of the Financial system Copyright© 2006 John Wiley & Sons, Inc. 25
6. Stability of foreign exchanges markets Copyright© 2006 John Wiley & Sons, Inc. 26
Possible Conflicts among goals Copyright© 2006 John Wiley & Sons, Inc. 27
Copyright© 2006 John Wiley & Sons, Inc. 28