Today we will discuss the Keynesian approach to monetary policy. We will use Keynes' theory of liquidity preference and the model of the money market in addition to the AS-AD model to determine the effects of Keynesian monetary policies on the macroeconomy. You should have read the text chapter identified below in the homework section and watched the related videos. We will start class today with you working cooperatively with a partner to find a solution to the "Problem of the Day" and then there will be a lecture on our next topic. This page contains all the information you need for today's class: homework, the problem of the day, helpful resources (videos, podcasts, etc.) and an explanation of the activities we will do in class. Use the table of contents on the right to help you navigate.
Read Mankiw (Chapter 34) and watch the following video.
Problem of the Day
Suppose the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves.
If 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?
Lecture
Related Readings