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BUDGET FUN! Federal.budgetchallenge.org/pages/overview Time to take a budget challenge! Go to the Congressional Budget Office page, under “Topics”, pick a topic you and your partner would like to read. Chose ONE article and outline some of the findings of the CBO. WRITE DOWN 2-3 questions your article has raised and be prepared to discuss! Be ready to present your findings to class Monetary Policy and the Interest Rate Module 31 Monetary Policy and Interest Rate Review! MM and LFM Short Run – r determined by MM Long Run – r is determined by the supply and demand of LF that arise when GDP is at full potential Monetary Policy and Aggregate Demand Monetary Policies and the r Federal Funds Rate The Fed sets a target FFR Impacts the money supply Open market operations are preferred by the Fed Currently: 0%-0.25% Expansionary and Contractionary Monetary Policies Monetary Policy in Practice Monetary right: Policy that shifts the AD curve Fed expands money supply Rates drop More investment spending Leads to I rGDP I consumer spending EXPANSIONARY! Monetary Policies in Practice Money supply is contracted: Fed contracts money supply Leads to I investment rates c I investment spending cI rGDP cI consumer spending Part of the Fed’s dual mandate is price (inflation) control Taylor Rule for Monetary Policy Set FFR to account for inflation rates and output gaps: FFR = 1 + (1.5 x infl. Rate) + (0.5 x OG) Taylor Rule Continued Taylor Rule Predicts what Fed SHOULD do Very good at predicting Fed behavior for economics Accounts Inflation for inflation and output gap issues Targets Fed’s mandate keep inflation low but no set rate is preferred Inflation Target – the rate the central bank wants to achieve Forward looking Taylor Rule looks back at past inflation rate for policy decisions Helps with transparency for the public Monetary Policy and Interest Rates Monetary/fiscal policy failures Over-borrowing (debt/deficit) Causes crowding out, implications for future debt Austerity – drastic cuts in social programs Inflation, Hyperinflation, Seigniorage Money supply disruption Results: Poverty, social conflict, political classes, inflationary issues, loss of FDI/borrowing power Monetary Policy and Interest Rates Regulations Regulatory powers reside in multiple agencies: FED SEC Treasury Department No major reform after 2008 collapse, however some changes: Stress tests Dodd-Frank Bill Still in flux Money, Output, and and Prices in the Long Run Module 32 Money, Output, and Prices Monetary policy action (not Fiscal) is the usual tool of choice for economic stabilization But – can a central bank make inappropriate decisions regarding expansionary/contractionary policy? In the long-run, the economy self corrects, so is correct policy an issue YES, it still can cause mass changes in the short run Effects of an Increase in the Money Supply In SR in increase in MS pushes AD right (lower rates = increased consumer spending, investment But y2 is above YP so in the LR, nominal wages will rise, increases SRAs until it gets to SRAS2, or equilibrium In the end, APL increases Monetary Neutrality So changes in MS can affect APL Changes are directly linked If there is a 25% change in MS, APL falls 25% in LR Exactly proportional This is known as money neutrality rGDP and the “value” of money does not change Changes in the Money Supply and the Interest Rate in the Long-Run Lessons? The Fed functions as a SR economic stabilizer, in the LR, gaps, wages, selfcorrection In the LR, changes in MS do NOT affect the money supply at all Poster Sessions You will choose an economics concept from Mods 33 or 34 (draw straws!) Use a laptop, your book, or another text to explore your concept. Use your creativity to provide visual and informational components to a “poster” Hang your poster! Walk throughout the classroom and take notes, ask questions, and provide feedback to the authors! 6/7th Groups 10th groups
