Introduction |
We now begin unit 3 where we focus on macroeconomic POLICY. When we say "policy" we mean "government". What can the government do to achieve the three macroeconomic goals of low UE, low IN, and rapid EG? In lesson 12c we introduced stabilization policies: monetary policy and fiscal policy. (This would be a good time to review your notes on lesson 12c.) Here, we will dig deeper, beginning with Monetary Policy (MP).In lesson 12 c we learned that if UE is high we can increase the money supply (MS) which will cause interest rates to go down. We called this an "Easy Money Policy". Lower interest rates will increase investment (I) and therefore increase aggregate demand (AD). When AD increases it will increase real domestic output (RDO or real GDP) and decrease UE. But, it may increase the price level (PL) and therefore increase inflation.We begin monetary policy in lesson 14a by defining money (what is money?) and the money supply (MS). Then we will develop the model (graphs) of the money market that we will use in the next three chapters to show how monetary policy works. We finish the lesson with a discussion of the structure of the Federal Reserve (the Fed). As we know from lesson 12a the Fed controls the money supply (MS). Here we learn that "the Fed" is NOT the federal government in Washington DC.The policy making arm of the Fed is
basically the Federal Open Market Committee (FOMC) comprised
of 12 people and these 12 people have the power to raise
interest rates and put millions of people of work as they
did in the early 1980s. Or, the FOMC can lower interest
rates causing millions of people to earn less on their
financial investments. The chairperson of the Fed (Jerome
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