4.6 Monetary Policy

Chain of events that follow a monetary policy:

• Contractionary policy: Change in the Monetary Base -> Change in Excess Reserves -> Change in capacity to make loans -> Change in the Money Supply -> Change in Nominal Interest Rates -> Change in Investment-Sensitive Consumption and Investment -> Change in Aggregate Demand -> Change in Price Level and Output -> Change in Unemployment

4.6 Monetary Policy

• The savers are the indirect lenders of the economy.

• The demanders are the borrowers of the economy.

• Equilibrium:

  Q1: Quantity of loanable funds

  R1: Real Interest rates

  Graph:

Differences Of Money Market and Loanable Funds Market:

• Money Market has nominal interest rate because it focuses on short term loans.

• Loanable funds Market has real interest rates because it focuses in long term Loans with anyone including governemnt.

• Both have an effect on aggregate demand. The first one is indirectly and the second one affects investing sensitive consumption and spending derectly.

National Savings:

• Communist economies are traditionally closed economies because they believe that an open market allows other nations to take control of their economy.

• Closed Economy:

  -In the absence of international borrowing and lending, national savings is the sum of public savings and private savings.

  National savings = Private Savings + Public Savings

• Open Economy: National savings = Private Savings + Public Savings + Net Capital Inflow

  -The savings of an economy is what fuels its capacity for investment. More savings, more investment.

• Net capital Inflow:

• Private savings also mean international private