Download Chapter 20: Monetary Policy

Chapter 20: Monetary Policy
LEARNING OBJECTIVES
The steps to achieve the learning objectives include reading sections from your textbook and the
“causation chain game,” which is available directly on the Tucker web site. The steps also include
references to “Ask the Instructor Video Clips,” the “Graphing Workshop” available through
EconCentral on the Tucker website.
#1 - Explain how equilibrium is achieved in the money market and the effect on interest rates from
changes in the money supply.
Step 1
Read the section in your textbook titled “The Keynesians View of the Role of Money.”
Step 2
Watch the Graphing Workshop “See It!” tutorial titled “The Money Market.” Study that
the money supply (MS) is represented by a vertical line and the equilibrium interest rate
is determined by the point where it intersects the demand for money curve (MD).
Step 3
Read the Graphing Workshop “Grasp It!” exercise titled “The Money Market.” This
exercise uses a slider bar to demonstrate how changes in the demand for money affect the
equilibrium interest rate.
Step 4
Read the Graphing Workshop “Grasp It!” exercise titled “Open Market Operations.”
This exercise uses a slider bar to demonstrate how changes in the supply of money affect
the equilibrium interest rate.
Step 5
Play the “Causation Chains Game” titled “The Demand for Money Curve.”
Step 6
Play the “Causation Chains Game” titled “The Equilibrium Interest Rate.”
Step 7
Play the “Causation Chains Game” titled “The Effect of Changes in the Money Supply.”
The Result
Following these steps, you have learned that an excess supply of money causes the
interest rate to fall and an excess demand for money drives the interest rate upward.
Represented by a vertical line, the money supply can be shifted rightward and leftward by
the Fed’s use of its tools. As a result, the equilibrium rate of interest changes.
#2 - Understand the Keynesian transmission mechanism.
Step 1
Read the subsection titled “How Monetary Policy Affect Price, Output, and
Employment.”
Step 2
Play the “Causation Chains Game” titled “The Keynesian Monetary Policy
Transmission Mechanism.”
Step 3
Listen to the “Ask the Instructor Video Clip” titled “Why Should We Care How Fast the
Money Supply Grows?” You will learn the monetary policy transmission mechanism.
The Result
Following these steps, you have learned that Keynesian policy argues that changes in the
money supply affect investment spending, which is a component of the aggregate
demand curve. Changes in the aggregate demand curve cause movements along the
aggregate supply curve and affect the price level and real GDP.
#3 - Understand the monetarist transmission mechanism.
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Step 1
Read the sections in your textbook titled “The Monetarist View of the Role of Money”
and “A Comparison of Macroeconomic View.”
Step 2
Play the “Causation Chains Game” titled “The Monetarist Policy Transmission
Mechanism.”
The Result
Following these steps, you have learned that Keynesians believe in an indirect
relationship in which an increase in the money supply lowers the interest rate which
increases investment and then the aggregate demand curve. Monetarists theorize a direct
relationship believe changes in the money supply and the aggregate demand curve.
Monetarists believe in the equation of exchange (MV=PQ), which argues that changes in
the money supply impacts the economy directly through all types of spending. M is the
money supply, and V is the velocity of money, or the number of times each dollar is spent
in a year. P is the average price level and Q is the quantity of actual output.
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