Economists have different answers to these questions.
Some argue that changing the money supply directly affects plan to counterfeit British currency, while others argue that changing the money supply directly affects planes flying over England.
Some economists think monetary pol has an influence on its value in the marketplace.
Interest icy is more effective than fiscal policy because of the rates and access to credit.
There are different views of spending behavior examined in this chapter.
Control over money money and assess its implications for policy.
If you harbor mystical notions about money and view it like any other commodity outcomes, you must abandon money and credit controls.
There's a demand for money and a supply of money.
It may seem strange to call interest rates the price of money.
The interest rate you're charged affects the price you pay.
People who don't borrow have to contend with the price of money.
Money can be held as a store of value.
People hold cash and have positive bank balances.
There is an opportunity cost associated with public money balances.
Money held in transactions accounts has little or no interest.
Money is held in accounts.
Money used to buy bonds or stocks is more likely to earn a higher interest rate than money used to make loans.
People who invest in mutual funds should be aware of the nature of money's price.
People who hold money in checking accounts pay no interest.
It's the same as the market rate of interest.
Money in interest-paying bank accounts earns some interest.
The forgone interest is the measure of opportunity cost with cash and regular checking accounts.
Chapter 14 was examined.
There are many good reasons to pay little or no interest on your money.
People who have mastered the principles of economics have money.
They want to buy things.
Unless there's money in the place to hold the bank, debit cards and ATM cards don't work.
A supporting bank balance is required for payment by e-cash.
When we use credit funds.
Merchants won't accept credit cards for small purchases.
The fear of the prover purpose is one of the reasons people hold money.
Money purchases may be required in a sudden emergency.
When the banks are closed or in a community where one's checks aren't accepted, such needs may arise.
Future income may diminish unexpectedly.
People have more money in their bank account than they anticipate spending.
People hold money for speculative reasons.
You could buy a "hot" stock or bond at a price that you think is attractive.
You would be holding money in the hope that a better financial opportunity would appear.
When interest rates rise, people cut down on their money balances.
The opportunity cost of holding money is too high.
When interest rates are high, many people move their money out of transactions deposits and into money market mutual funds.
Corporations are more careful with their money when interest rates go up.
Better money management requires watching checking account balances more closely and making more frequent trips to the bank, but the opportunity costs are worth it.
The figure shows the market demand for money.
Money markets are easy to follow once a money demand curve and a money supply curve are available.
Existing demands for holding money are reflected in the money demand curve.
The Federal Reserve policy, the lending behavior of private banks, and the willingness of consumers and investors to borrow money are some of the factors that affect its position.
The interest rate is equal to the quantity demanded.
The interest rate of 7 percent equates to the desires of suppliers and demanders.
The quantity of money demanded wouldn't be the same as the quantity supplied at any rate of interest other than 7 percent.
When interest is supplied, look at the imbalance.
It must be held by someone.
People will change their portfolios by moving money out of cash and bank accounts into bonds or other assets that offer higher returns.
The amount of money people are willing to hold depends on the interest rate.
Interest rates are affected by changes in the money supply.
People are willing to hold more money when interest rates go down.
The quantity of money demanded is the same as the quantity supplied.
People are content with their portfolio choices.
The equilibrium rate of interest can change.
The equilibrium rate of interest can be impacted by monetary policy.
The equilibrium interest rate is 7 percent.
Purchasing additional bonds in the open market is most likely the reason for lowering the reserve requirement.
The market rate of interest is 6 percent.
The Fed tends to lower the equilibrium rate of interest by increasing the money supply.
Interest rates would rise if the Fed reversed its policy.
The interest on interbank loans is the same as the interest on interbank reserve loans.
The federal funds rate is likely to affect a whole hierarchy of interest rates.
Dozens of different interest rates are available for 15.09 loan terms.
The Federal Reserve is the source of many of these.
A change in the interest rate isn't the end of the story.
Monetary policy aims to alter macroeconomic outcomes: prices, output, and employment.
There needs to be a change in demand.
How changes in interest rates affect consumer, investor, government, and net export spending is the next question.
Monetary stimulation is a policy that should be considered first.
Lower interest rates are a tactic for doing so.
The rate of interest is sensitive to the rate of alternative price levels in a given investment decision.
The opportunity cost of holding inventories is reduced by lower interest rates.
The movement down the investment-demand curve in step 2 of Figure 15.3 shows that a lower rate of interest should result in a higher rate of investment spending.
The jump in spending will cause a bigger increase in aggregate demand.
When interest rates fall, consumers may change their behavior.
Mortgage payments decline as interest rates fall.
Home equity and credit card balances may decline in monthly payments.
Billions of consumer dollars are freed up by these lower interest changes.
The rate of interest is lowered by more investment increases.
An increase in the money supply may cause interest rates to go up and cause aggregate demand to go up.
When homeowners increase their gage on their 30-year-old home this month for the second mortgage amounts based on the appreciation of their homes time in less than a year, Jay and Sharon Sebastian are doing "cash-outs".
Like millions of others, they took and pocket the difference.
The extra cash, along with lower monthly mortgage pay, is acting as a key source of from 65/8% to 6%, they increased the mortgage on their four spending as the U.S. economy deteriorated.
$140 billion was taken out of the bank last year.
That cut them a check for $25,000, which they're using to remodel, which helped boost consumer spending in a year that saw a falling stock market and the Sept. 11 attacks.
The economy benefits from more than the first sale.
Jay, a family on a trip to Disney World, says that if the Sebastians' contractor uses his cut to take his deposit, it will go back into the economy.
Market participants spend more money when interest rates are low.
The AD curve is shifted rightward.
State and local governments can conclude that lower interest rates increase desirability of public works.
Aggregate demand would be increased by all such responses.
A full-point reduction in long-term interest rates would increase aggregate demand just as much as a $100 billion injection of new government spending.
Low interest rates led to a consumer spending spree.
The AD curve was shifted rightward by the injection of new spending.
The reduction in spending will keep demand from rising.
An unexpected quickening in the pace of inflation in the first quarter is a matter for price increases in the past two months is challenging the Fed concern.
The recent shift in prices is at odds with Fed officials' forecast funds rate, charged on overnight loans between banks, from that the combination of unemployment, unused industrial 1% at its late June meeting.
Markets are assuming that the rate of growth in productivity will keep inflation in check and that it will rise to 2% by the end of the year.
Fed officials acknowledge that their primary concern has shifted in the past few months from sluggish job growth to rising prices.
Monetary restraint is appropriate when inflationary pressures build up.
Aggregate demand may be restrained by higher interest rates.
The mechanics of monetary policy are similar to those used to fight unemployment.
We want to increase the rate of interest to discourage spending.
The Fed can raise interest rates by selling bonds, increasing the discount rate, or increasing the reserve requirement.
The actions reduce the money supply and help establish a higher equilibrium rate of interest.
Reducing aggregate demand is the ultimate objective of a restrictive monetary policy.
Spending behavior needs to be responsive to interest rates for monetary restraint to succeed.
There was reduced aggregate demand.
The impact of interest rates on aggregate demand was shown in Figure 15.3.
An official explanation of ments will no longer be profitable at higher rates of interest.
Many consumers will decide that they can't afford monetary policy, with links to the higher monthly payments associated with increased interest rates; purchases of homes, cars, relevant data, visit the Minneapolis and household appliances will be postponed.
State and local governments can also use the Fed.
inflationary pressures are lessened by the leftward shift of the AD curve.
The monetaryStimulus of 2001-2 was so effective that the Fed started worrying about inflation in 2004.
Monetary policy was changed in June 2004.
The Fed raised the federal-funds target rate 17 times.
The mechanics of monetary policy are easy to understand.
The Fed's ability to alter money supply, interest rates, and aggregate demand can be limited by a number of constraints.
In 2001, the Fed reduced the federal funds rate by three full percentage points, the biggest reduction in short-term rates since 1994.
Long-term rates fell less.
The interest rate on 30-year mortgages fell less than half a percentage point in the first few months of monetary stimulation.
The Fed reversed direction in 2004.
The fed funds rate was raised from 1.0 to 5.25 percent.
10-year Treasury bonds and home mortgages rose only modestly.
There are a number of reasons why long-term rates might not mirror short-term rates.
Private banks' willingness to increase their lending activity is the first potential constraint.
The cost of funds to the banking system can be reduced by the Fed.
Unless banks lend more money, the money supply won't increase.
The money supply won't increase as much if the banks accumulate excess reserves.
In 2001, when the Fed was trying to boost the economy, banks were reluctant to increase their loan activity.
Banks were trying to shore up their own equity and were wary of making new loans in a weak economy.
When short-term rates are falling, long-term rates stay high.
A rising tide of bad commercial loans could make banks more demand from corporate borrowers, companies could find reluctant to lend and the impact of the Federal Reserve's loans harder to get, which could slow the economic recovery.
The Banks earned a record $19.9 billion in the first quarter, but increase in problem loans and urged banks not to choke off the proportion of commercial loans 90 days or more past due to healthy borrowers.
According to a survey, half of all banks have tightened their loan standards this year.
In the same period, banks wrote off $7 billion in bad loans.
The 38 percent increase from a year earlier was the most frequently cited reason.
Christine Dugas is worrisome because of the combination of higher write-offs and delinquent loans.
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New bank reserves created by the Fed won't help the economy if banks aren't willing to make new loans.
The opportunity cost of holding money is cheap when interest rates are low.
People may decide to hold on to their money, waiting for better opportunities to improve.
Bond prices may be high or low.
The risk of capital losses and little reward are associated with buying bonds at such times.
Market participants can decide to hold any additional money from the Fed.
The money demand curve has no effect on the rate of interest.
There is nothing money at all.
When the money supply is low, the equilibrium rate of interest doesn't fall.
People are willing to hold on to the money without a reduction in the rate of interest.
We don't know if aggregate demand will increase as expected even if short- and long-term interest rates fall.
Investment decisions are motivated by expectations as well as interest rates.
Corporations have little incentive to expand production capacity during a recession when unemployment is high and spending is low.
With little expectation of future profit, investors are likely to be unimpressed by cheap money and may decline to use the lending capacity that banks make available.
Consumers are reluctant to borrow when their income prospects are uncertain.
Interest rates can fall if a liquidity trap is not put in place.
A lower interest rate won't always increase the amount of money in an investment.
Interest rates won't go down if investors have bad expectations for money supply.
The horizontal segment of the money demand curve may not be altered by small reductions in interest rates.
The rate of investment is not falling.
Sales and earnings continue at companies across the nation.
Federal Reserve officials attempted to drive away the storm cloud by cutting interest rates by a quarter percentage point yesterday.
In the format Text keep easing credit conditions through the summer, they sent a clear signal that they were poised to with permission of DOW JONES & COMPANY, INC.
Investment and consumption are supposed to be stimulated by interest rate cuts.
People may be deterred from borrowing and spending because of gloomy expectations.
There is no assurance that lower interest rates will increase borrowing and spending.
Even before the September 11 terrorist attacks, there was a reluctance to spend.
Although the Fed pushed interest rates down to 20-year lows, investors and consumers preferred to pay off old debts.
People were more reluctant to borrow and spend after the September 11 attacks.
In Japan, monetary stimulation was not as effective as it could have been.
The discount rate was cut by the Japanese central bank from an extraordinary low 1/2 percent to an unheard of 1/2 percent.
Consumers in Japan were trying to save more money during the recession.
The reduction in the rate of interest doesn't increase investment spending.
Businesses are unwilling to invest more funds.
Aggregate spending doesn't rise.
Even though the rate of interest has been lowered, the Fed's policy objective remains unfulfilled.
Investments that have lower interest rates are more profitable.
It takes time to develop and implement new investments.
For consumers, the same is true.
When the Fed reduces interest rates, consumers don't rush out and buy new homes.
According to the News on the next page, it may take 3-6 months before market behavior responds to monetary policy.
It took investors and consumers a long time to respond to the monetaryStimulus of 2001-2.
It takes less time than it takes formation to travel at high speeds, but it is simple for companies and individuals to adjust to changes in the decisions about how to invest in stocks, whether to buy a new economy.
It can take between six and 12 months to make their presence felt, and it can take between six and 12 months to upgrade their business when it's the right time to do so.
Bruce Steinberg is the chief economist at Merrill Lynch.
The Federal Reserve pushed through on Wednesday.
It takes time for businesses and consumers to make new loan and expenditure decisions.
There is a time lag for monetary-policy effects.
In pursuit of tight money, the Fed could cause interest rates to go up.
If high expectations for rising sales and profits overwhelm high interest rates in investment decisions, market participants might continue to borrow and spend.
Consumers might think that future incomes will be enough to cover larger debts.
Both groups think that inflation will make high interest rates look cheap in the future.
The World View below documents show the case in Britain in 2004.
Market participants might use global sources of money.
Business may borrow funds from foreign banks if money gets too tight.
The Bank of England tightened monetary policy on June 10.
With the British economy still expanding, the moves have done little to curb borrowing, and more hikes are on the way.
Home buying is still robust.
The rate for easy access to credit and the strong labor markets is 4.5%.
It was the fourth increase in spending.
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Even when interest rates rise, strong expectations and rising incomes may fuel continued spending.
Market participants can get funds from nonbank sources in the United States.
Nonbank and global lenders make it harder for the Fed to control demand.
Monetary policy is an undependable policy lever because of the constraints on it.
Keynes said monetary policy wouldn't be very effective in ending a deep recession.
He believed that the combination of low expectations and the reluctance of bankers would make monetary stimulation ineffectual.