Money Market
description
Transcript of Money Market
FED buys bonds from the publicDraw graph showing effect on interest rate. What happens to value of $ in foreign exchange
market?
MoneyMarket
Sm1 Sm2
Dm
Q
i
Q1 Q2
i1
i2
Draw graph showing effect on the interest rate from increased
saving in the U.S. What happens to nation’s capital stock?
LoanableFundsMarket
DLF
Q
i
Q1 Q2
i1
i2
SLF1
SLF2
Effect on P and GDP when $ depreciates
AD/ASAS
AD1
GDP
P
Q2Qf
P2
P1
ASLR
AD2
FED sells bonds. Draw graph showing effect on interest rate.
What happens to the value of the $ in the foreign exchange
market?
MoneyMarket
Sm1Sm2
Dm
Q
i
Q1Q2
i1
i2
Government & FED do nothing in response to short-run recession
AD/AS
AD
GDP
P
Q1 Qf
P2
P1
ASLR
ASSR1
ASSR2
Effect on interest rate when government runs a budget deficit
LoanableFundsMarket
SLF
DLF2
Q
i
Q1 Q2
i1
i2
DLF1
Value of U.S. $ and Japanese yen when U.S. interest rates increase. What happens to
American imports and exports?
Foreign Exchange Market
DYen
Q
P ($)
Q1 Q2
P1
P2
SYen1
SYen2
YenQQ2Q1
P2
P1
P (Yen)
D$1
D$2
S$
Dollars
Effect on P, GDP when $ appreciates
AD/ASAS
AD1
GDP
P
Q2Qf
P2
P1
ASLR
AD2
Effect on AD of FED’s bond sales during inflation
AD/ASAS
AD1
GDP
P
Q1Qf
P2
P1
ASLR
AD2
Government and FED do nothing in response to short-run inflation
AD/AS
AD
GDP
P
Q1Qf
P2
P1
ASLRASSR1
ASSR2
Effect on AS and SRPC when price of oil increases dramatically
Inflationrate
Unemployment rate
SRPC1
SRPC2
AD
AS1
AS2P
GDP
P2
P1
GDP2 GDP1
P goes upUnemployment rises
Expansionary fiscal policy during a recession
AD/ASAS
AD1GDP
P
Q1 Qf
P2
P1
ASLR
AD2
Effect on ASLR and LRPC when U.S. capital stock increases
Effect on ASP
GDP
Inflation
Unem.
ASLR1 ASLR2
Qf1 Qf2 NRU1NRU2
LRPC1LRPC2
The FED and Monetary policy• Always affects the money market
• Money market has vertical supply curve
• Increase in money supply lowers interest rates – increases investment and consumption and AD
• Lower interest rates cause $ to depreciate – exports increase, imports decrease
• Decrease in money supply has opposite effect
Loanable funds market
• S affected by savings; D affected by increased budget deficit (increasing G or decreasing taxes)
• Upward sloping S curve
• Increase in budget deficit raises interest rates (decreases I and C – crowding out)
• Increase in savings lowers interest rates
• Changes in income affect BOTH savings and consumption in the same direction
Short run vs. long run• If unemployment rises in the short run,
wages fall
• Falling wages increases AS (shifts to right)
• If unemployment falls in the short run, wages rise
• Rising wages decreases AS (shifts to left)
• Long run equilibrium is at the NRU
Capital Flows• Money coming into a country increases D for
that currency and increases S of other currency• Increasing D for a currency causes it to
appreciate; increasing S for a currency causes it to depreciate
• Higher interest rates in a country increases D for its currency b/c it increases the D for that country’s financial assets
• A higher P in a country decreases D for its currency b/c people will buy another country’s goods instead