1. The Money Market Graph and the 3 Policy Tools that Change the Money Supply Monetary Policy
2. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money The M1 Money Supply is the MOST liquid form of The Money Supply (Cash, Checkable Deposits, Travelers Checks). IMPORTANT NOTE!!! When the Federal Reserve conducts a Monetary Policy It is changing, either INCREASING or DECREASING , The M1 Money Supply!! This graph is known as THE MONEY MARKET GRAPH When the Federal Reserve conducts a Monetary Policy this Is the FIRST market that is affected. Notice that the Money Supply (MS*) curve is VERTICAL This is because the Quantity of Money in circulation is FIXED At any given time. This measure of the Quantity of Money is The M1 Money Supply
3. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money The Money Market graph is used to Illustrate SHORT-TERM Interest Rates. SHORT-TERM interest rates are established , well, in The short-term, so Inflation (in terms of the interest Rate) is not a factor. Hence, we call this Interest Rate the NOMINAL INTEREST RATE. There are MANY short-term interest rates in the financial system, but we will be concerned with only one: The FEDERAL FUNDS RATE
4. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money The FEDERAL FUNDS RATE is ONE of TWO interest rates that the Federal Reserve has DIRECT control over. It is defined as the Interest Rate Banks charge EACH OTHER to BORROW money from EACH OTHER . It is also know as the Overnight Lending Rate. For our purposes, equate the Nominal Interest Rate with the Federal Funds Rate: When The Nominal Interest Rate changes so does the Federal Funds Rate.
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9. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money First we are going to examine what shifts the Money Supply Curve in the Money Market ANY OF THE FOLLOWING MONETARY POLICIES CAN SHIFT THE MONEY SUPPLY CURVE: 3. Change the Required Reserve Ratio The Required Reserve is the amount that banks are required to with-hold from EACH deposit they receive . Expressed as a percentage. i 1 Q ms1 MS 1 If the Federal Reserve DECREASES the Required Reserve Ratio then banks will have LESS in R.R . and MORE in EXCESS RESERVES. This money will go into the banks EXCESS RESERVES to be loaned out and the money supply will INCREASE. THE NOMINAL INTEREST RATE WILL DECREASE
10. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money i 1 Q 1 First we are going to examine what shifts the Money Supply Curve in the Money Market ANY OF THE FOLLOWING MONETARY POLICIES CAN SHIFT THE MONEY SUPPLY CURVE: 3. Change the Required Reserve Ratio The Required Reserve is the amount that banks are required to with-hold from EACH deposit they receive . Expressed as a percentage. MS 1 If the Federal Reserve INCREASES the Required Reserve Ratio then banks will have MORE in R.R . and LESS in EXCESS RESERVES. This will DECREASE the money in EXCESS RESERVES to be loaned out and the money supply will DECREASE. THE NOMINAL INTEREST RATE WILL INCREASE
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13. Money Market MS* i* Money Demand (MD*) Q* ms Nominal Interest Rate Quantity of Money
