Scribd Logo
Upload

Welcome to Scribd!

  • 64 views

    Mishkin Embfm12ege ch22

    Uploaded by

    محمد ابوشريف
    This chapter develops the monetary policy curve which shows the relationship between interest rates and inflation, and shows how it combines with the IS curve to form the aggregate demand curve. It explains that central banks raise interest rates by more than inflation to stabilize prices, causing the monetary policy curve to slope up. Shifts in the IS curve or monetary policy curve cause the aggregate demand curve to shift accordingly.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Mishkin Embfm12ege ch22

    Uploaded by

    محمد ابوشريف
    64 views18 pages
    This chapter develops the monetary policy curve which shows the relationship between interest rates and inflation, and shows how it combines with the IS curve to form the aggregate demand curve. It explains that central banks raise interest rates by more than inflation to stabilize prices, causing the monetary policy curve to slope up. Shifts in the IS curve or monetary policy curve cause the aggregate demand curve to shift accordingly.

    Original Description:

    PowerPoint slides for macroeconomy

    Original Title

    mishkin_embfm12ege_ch22

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This chapter develops the monetary policy curve which shows the relationship between interest rates and inflation, and shows how it combines with the IS curve to form the aggregate demand curve. It explains that central banks raise interest rates by more than inflation to stabilize prices, causing the monetary policy curve to slope up. Shifts in the IS curve or monetary policy curve cause the aggregate demand curve to shift accordingly.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    64 views18 pages

    Mishkin Embfm12ege ch22

    Uploaded by

    محمد ابوشريف
    This chapter develops the monetary policy curve which shows the relationship between interest rates and inflation, and shows how it combines with the IS curve to form the aggregate demand curve. It explains that central banks raise interest rates by more than inflation to stabilize prices, causing the monetary policy curve to slope up. Shifts in the IS curve or monetary policy curve cause the aggregate demand curve to shift accordingly.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 18

    The Economics of Money, Banking, and

    Financial Markets
    Twelfth Edition, Global Edition

    Chapter 22
    The Monetary Policy and
    Aggregate Demand Curves

    Copyright © 2019 Pearson Education, Ltd.


    Preview
    • This chapter develops an explanation for why monetary
    policy makers put upward pressure on interest rates when
    inflation increases.
    • This relationship is then used to develop the monetary
    policy curve.
    • The monetary policy curve is then used in conjunction with
    the IS schedule to derive an aggregate demand curve,
    which shall be used in the discussions that follow.

    Copyright © 2019 Pearson Education, Ltd.


    Learning Objectives
    • Recognize the impact of changes in the nominal federal
    funds rate on short-term real interest rates.
    • Define and illustrate the monetary policy (MP) curve and
    explain shifts in the MP curve.
    • Explain why the aggregate demand (AD) curve slopes
    downward and explain shifts in the AD curve.

    Copyright © 2019 Pearson Education, Ltd.


    The Federal Reserve and Monetary Policy
    • The Fed of the United States conducts monetary policy by
    setting the federal funds rate—the interest rate at which
    banks lend to each other.
    • When the Federal Reserve lowers the federal funds rate,
    real interest rates fall.
    • When the Federal Reserve raises the federal funds rate,
    real interest rates rise.

    Copyright © 2019 Pearson Education, Ltd.


    The Monetary Policy Curve
    • The monetary policy (MP) curve shows how monetary
    policy, measured by the real interest rate, reacts to the
    inflation rate, :

    r  r  
    where
    r  autonomous component of r
      responsiveness of r to inflation

    • The MP curve is upward sloping. Real interest rates rise


    when the inflation rate rises.

    Copyright © 2019 Pearson Education, Ltd.


    Figure 1 The Monetary Policy Curve

    Copyright © 2019 Pearson Education, Ltd.


    The Taylor Principle: Why the Monetary
    Policy Curve Has an Upward Slope
    • The key reason for an upward sloping MP curve is that
    central banks seek to keep inflation stable.
    • Taylor principle: To stabilize inflation, central banks 
    must raise nominal interest rates by more than any rise in
    expected inflation, so that r rises when rises.
    • Schematically, if a central bank allows r to fall when 
    rises, then (Yad = AD):

      r  Y ad    r  Y ad   

    Copyright © 2019 Pearson Education, Ltd.


    Shifts in the MP Curve
    • Two types of monetary policy actions that affect interest
    rates:
    – Automatic (Taylor principle) changes as reflected by
    movements along the MP curve (2004–2006)
    – Autonomous changes that shift the MP curve
     Autonomous tightening of monetary policy that shifts
    the MP curve upward
     Autonomous easing of monetary policy that shifts
    the MP curve downward (in order to stimulate the
    economy as what the Fed was doing at the onset of
    the global financial crisis)

    Copyright © 2019 Pearson Education, Ltd.


    Figure 2 Shifts in the Monetary Policy
    Curve

    Copyright © 2019 Pearson Education, Ltd.


    Figure 3 The Federal Funds Rate and
    Inflation Rate, 2003–2017

    Copyright © 2019 Pearson Education, Ltd.


    The Aggregate Demand Curve
    • The aggregate demand curve represents the relationship
    between the inflation rate and aggregate demand when the
    goods market is in equilibrium.
    • The aggregate demand curve is central to aggregate
    demand and supply analysis, which allows us to explain
    short-run fluctuations in both aggregate output and
    inflation.

    Copyright © 2019 Pearson Education, Ltd.


    Deriving the Aggregate Demand Curve
    Graphically
    • The AD curve is derived from:
    – The MP curve
    – The IS curve
    • The AD curve has a downward slope: As inflation rises, the
    real interest rate rises, so that spending and equilibrium
    aggregate output fall.

    Copyright © 2019 Pearson Education, Ltd.


    Figure 4 Deriving the AD Curve

    Copyright © 2019 Pearson Education, Ltd.


    Factors That Shift the Aggregate Demand
    Curve
    • Shifts in the IS curve
    – Autonomous consumption expenditure
    – Autonomous investment spending
    – Government purchases
    – Taxes
    – Autonomous net exports
    • Any factor that shifts the IS curve shifts the aggregate
    demand curve in the same direction.

    Copyright © 2019 Pearson Education, Ltd.


    Deriving the AD Curve Algebraically
    • Combining the IS and MP curves:
    IS :
    MP:
    • Algebraic manipulation gives the AD curve:

    • What factors affect the slope of the aggregate demand


    curve?

    Copyright © 2019 Pearson Education, Ltd.


    Figure 5 Shift in the AD Curve from Shifts
    in the IS Curve

    Copyright © 2019 Pearson Education, Ltd.


    Factors That Shift the Aggregate Demand
    Curve
    • Shifts in the MP curve
    – An autonomous tightening of monetary policy, that is a
    rise in real interest rate at any given inflation rate, shifts
    the aggregate demand curve to the left
    – Similarly, an autonomous easing of monetary policy
    shifts the aggregate demand curve to the right

    Copyright © 2019 Pearson Education, Ltd.


    Figure 6 Shift in the AD Curve from
    Autonomous Monetary Policy Tightening

    Copyright © 2019 Pearson Education, Ltd.

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy