This document summarizes key concepts in macroeconomics including: 1) The Federal Reserve has four main monetary policy tools to influence the money supply and interest rates: the discount rate, reserve ratio, open market operations, and excess reserve rate. 2) To address inflation, the Fed would decrease the money supply by raising rates and selling bonds. To address unemployment, the Fed would increase the money supply by lowering rates and buying bonds. 3) Other topics covered include the money supply process, excess reserves, quantitative easing, and the lender of last resort function. A quiz asks how the tools would be used for problems like inflation, unemployment, and stagflation.

2. Lecture 15
Macroeconomics

3. Opening
Prayer

4. Quiz Master

5. Exam 2
Chapter 10-16
Friday October 29th
Testing Center

6. Money Supply Tools
Excess
Reserve
s
Rate
Open
Marke
t
Operations
Discoun
t
Rate
Reserv
e
Ratio

7. Discount Rat
e
In
fl
uences other
rates

8. 0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Time to Maturity
Interes
t
Rate FED Changes
Discount
Rate
Other Rates
Follow

9. Open Market
Operations
Buying and Sellin
g
Financial
Instruments

11. Bank
s
now have more
cash to loa
n
Central Bank
Public Banks
Increase Money Supply?
Buy bonds for cash

12. Bank
s
now have less
cash to loa
n
Central Bank
Public Banks
Decrease Money Supply?
Sell bonds for cash

13. What do banks do with
extra money
?
Excess Reserve
s
The FED will pay them
interest

14. Excess Reserves Interes
t
If the rate is high enough
you will leave it in the
bank.
Sets a
fl
oor

15. Problem
Recessio
n
Shift AD to Right
In
fl
atio
n
Shift AD to Left
Tools
Increas
e
Money Supply
Decreas
e
Money Supply
Reserve Ratio Lower Raise
Discount Rate Lower Raise
Open Market
Operations
Buy Bonds
from the Banks
Sell Bonds
to the Banks
Excess Reserve
s
Interest Rate
Lower Raise

16. Disin
fl
atio
n
Slower growth in in
fl
ation rat
e
8% to 3
%
De
fl
atio
n
Negative in
fl
atio
n
8% to -3%

17. Illiqui
d
No cas
h
Net worth to pay debt, but can’t
sell quick and without loss
Insolven
t
No cas
h
No net worth to pay debt

18. Illiqui
d
Assets are frozen

19. Quantitive Easin
g
Buying lots of other
fi
nancial
instruments
.
Lots of illiquid assets

20. Lender of Last
Resort
Bailouts

21. Qui
z
1.What are the four monetary tools
?
2. How do you use the tools if the problem is in
fl
ation
?
3. How do you use the tools if the problem is
unemployment
?
4. How do you use the tools if the problem is stag
fl
ation?

22. Problem
Mone
y
Supply
AD
Shift
Reserv
e
Ratio
Discoun
t
Rate
Open
Marke
t
Operations
Exces
s
Reserv
e
Rate
In
fl
ation
Unemployment
Stag
fl
ation
Left Increase Increase
Sel
l
Bonds Increase
Right Decrease Decrease Decrease
Bu
y
Bonds
Increase
Decrease