Module 31 & 33

THE FED DOES NOT CONTROL TAXES!!!!! MMMK?!?!

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Warm Up

Monetary Policy

What is the Fed Funds Rate

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What is the target Fed Funds Rate

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What is the Taylor rule

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AD

AD2

SRAS

LRAS

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Monetary Policy

How is inflation a tax?

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What is seignorage?

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Inflation

Bought by

Banks/Public

Fed creates Money

From Bank

Sells to the Fed

*Called Monetizing the Debt*

Its a way to pay for stuff without

raising taxes… can create inflation

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Inflation

The economy has started to grow an a very rapid rate due to low interest rates. What type of inflation is this and how could the monetary policy solve this problem

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Practice

Due to a decrease in the production of oil gas prices have soared. What type of inflation would this cause?

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What can the government do to fix this problem?

What can the Federal Reserve do to fix this problem?

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Practice

Due to unanticipated mandatory spending by the government there has been an increase in inflation. Graph the problem. Give a fiscal policy solution.

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Practice

The government has created monopolies all throughout the economy. With no competition the large companies are raising prices.

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What type of inflation is this?

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Practice

Graph a fully labeled AD-AS Graph…

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Practice

Suppose the economy is currently suffering from a very high rate of inflation caused by aggregate demand that has increased beyond potential GDP

a. In a correctly labeled graph, show equilibrium in the money market

b. In a correctly labeled AD-AS graph, show the current short-run equilibrium in the macroeconomy

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Practice

Suppose the economy is currently suffering from a very high rate of inflation caused by aggregate demand that has increased beyond potential GDP

a. In a correctly labeled graph, show equilibrium in the money market

b. In a correctly labeled AD-AS graph, show the current short-run equilibrium in the macroeconomy

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Practice

Suppose the economy is currently suffering from a very high rate of inflation caused by aggregate demand that has increased beyond potential GDP

c. In response to this high inflation rate, what open market operation should the Fed undertake?

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Practice

Suppose the economy is currently suffering from a very high rate of inflation caused by aggregate demand that has increased beyond potential GDP

d. In your graph from part (a), show the impact of this monetary policy in the money market and on the equilibrium interest rate

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Practice

Suppose the economy is currently suffering from a very high rate of inflation caused by aggregate demand that has increased beyond potential GDP

e. In your graph from part (b), show the impact of this monetary policy on real GDP and the price level

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Practice

Suppose the economy is currently suffering from a very high rate of unemployment caused by a decrease in consumer confidence in the economy

a. In a correctly labeled graph, show equilibrium in the money market

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Practice

Suppose the economy is currently suffering from a very high rate of unemployment caused by a decrease in consumer confidence in the economy

b. In a correctly labeled AD/AS graph, show the current short-run equilibrium in the macroeconomy

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Practice

Suppose the economy is currently suffering from a very high rate of unemployment caused by a decrease in consumer confidence in the economy

c. What monetary policy tool could the Fed undertake to correct the problem?

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Practice

Suppose the economy is currently suffering from a very high rate of unemployment caused by a decrease in consumer confidence in the economy

d. In your graph from part (a), show the impact of this monetary policy in the money market and on the equilibrium interest rate

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Practice

Suppose the economy is currently suffering from a very high rate of unemployment caused by a decrease in consumer confidence in the economy

e. In your graph from part (b), show the impact of this monetary policy on real GDP and the price level

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Practice

YOU KNOW

WHAT TO DO

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Exit Ticket