Today we will learn about the tools available to central banks (The Federal Reserve in the United States) in making monetary policy. We will also study the effects of monetary policy on the macroeconomy. Click here to download a PowerPoint on the topic (Chapter 29 Notes Page and the Chapter 34 Notes Page).
Mini-lecture: Monetary Policy
Assignments
Read Mankiw (Chapter 29 - Section on "The Fed's Tools of Monetary Control" and Chapter 34 - Section on "How Monetary Policy Influences Aggregate Demand") and watch the following videos.
Formative Assessment (MCQ's): You will take a formal assessment during class. The assessment will consist of multiple-choice questions and one FRQ from an old AP Exam. Doing the problem of the day and ensuring that you understand it will help you prepare for today's formative assessment and help to ensure that you understand the concepts in this lesson.
Problem of the Day
If the reserve requirement is 20% and the Fed sells $1 million of government bonds, what is the effect on the economy's reserves and money supply?
Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?
Using one graph of the money market and an AS-AD graph, explain the effect of the policies in (1) and (2)?