interest rates & monetary policy part ii ap macroeconomics

Interest Rates & Monetary Policy Part II

AP Macroeconomics

Where did we come from? In a previous lesson, we

explored the relationship between nominal interest rate and the real interest rate.

We also discussed the Fisher Effect, which demonstrates how changes in the money supply affect nominal interest in the long run.

http://www.extirpated.org/3.html

Fisher Effect, you say?

The Fisher Effect

(no, not the Fish Effect)

This relationship (that is, that between the real interest rate and the nominal interest rate) is called:

http://www.petsfoto.com/top-10-beautiful-colorful-fish/

Fisher Effect in a Nutshell…

Changes in MS Changes in the Price Level…which in turn lead to Changes in the Nominal Interest Rate!

Where are we going?

In this lesson, we are going to bring the macroeconomic model together with monetary policy actions.

This will, ultimately, help you analyze current monetary policy and understand monetary policy discussions.

http://www.stlouisfed.org/inplainenglish/monetary_policy.htm

What we know…

We already know that changes in the money supply (MS) lead to changes in aggregate demand.

Changes in the money supply over time result in changes in the price level, and back to the original output level.

Why? Monetary policy is neutral.

What is neutrality of money?

In the long run, increases in the money supply translate into increases in the price level and (therefore) no long term increase in output.

http://techliberation.com/wp-content/uploads/2009/07/638px-World_War_II_Domestic_Price_Controls.gif

From the Short-Run to the Long-Run

Visual 3.13 Unit 3 Macroeconomics

When there’s an increase in AD to AD1, in the long-run the SRAS shifts and returns to equilibrium (SRAS to SRAS1). Ultimately, this leads to a higher price level.

When there’s an increase in the MS, AD increases, and in the long-run, the price-level increases too (but output does not).

And now…

Some resources:

Reffonomics:http://www.reffonomics.com/

Morton workbook: Activity 42

Works Cited Economics of Seinfeld.

http://yadayadayadaecon.com/ Krugman, Paul, and Robin Wells. Krugman’s

Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.