part 2, the fed, bitcoins, and inflation
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THE FED, BITCOINS, AND
INFLATION2. MONEY AND THE REAL
ECONOMY
Dale R. DeBoer, PhDDepartment of Economics, UCCS
Interest rate channel
Tools of monetary control
Required reserve ratio
Primary credit rate
Federal funds rate target
Interest rate channel
Tools of monetary control
Required reserve ratio
Primary credit rate
Federal funds rate target
Open market transactions
Bond market
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 1
PB = $800
Face value = $1,000
Maturity date = 1 year
Interest rate?
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 1
PB = $800
Face value = $1,000
Maturity date = 1 year
Interest rate?
$200/$800 = 25%
Interest rate channel
Bond market
PB and interest rates are inversely
related
Example 2
PB = $900
Face value = $1,000
Maturity date = 1 year
Interest rate?
$100/$900 = 11%
Interest rate channel
Interest rates and economic activity
Excess reserves and lending
Excess reserves represent lost profits
More lending activity
Interest rate channel
Interest rates and economic activity
More lending
More borrowing
More spending
Price channel
Equation of exchange
Rates of change
Money growth plus the rate of change
in velocity is equal to inflation plus
real output growth
Price channel
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
Foreign exchange channel
Effect of an increase in MS?
RUS falls
Entails an increase in the spot
exchange rate
$/£ ↑
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
Dollar cost of a £10,000 item?
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
$2 per £1
Dollar cost of a £10,000 item?
Foreign exchange channel
Effect of a rising spot exchange
rate?
Example
$1 per £1
$2 per £1
Impact on imports? Exports?
Impact on aggregate demand?
Expected expansionary effects
Lower interest rates, increased
borrowing
Increased inflationary pressures
Higher net exports
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