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  • AD/AS analysis suggests that in the short run, expansionary monetary policy will shift the aggregate demand

  • the feds Buying Bonds through OMOs counter the crowding out effect on interest rates by the government


The Federal Funds Rate:

  • Is the interest rate banks charge each other for short term loans

  • Is influenced by omo

  • If the Feds buy bonds on the open market, banks will have an increase in reserves (excess)


Bars of Gold: Uniform & Durable


If the Feds sell bonds:

  • Reserves decrease

  • money supply decrease

  • interest rates increase



Expansionary fiscal policy will result in increased interest rates unless the money supply is increase


The Feds mostly combat a recession by buying securities


Expansionary monetary Policy Results in (short run):

  • money supply increases

  • nominal interest rate decreases

  • Bond prices increase

  • RIR decrease


Nominal IR = Real IR + Inflation


If Actual Employment Rate > NRU:

  • Feds can increase administered interest rates


A barter economy is different from a money economy as there are higher costs for each transaction in a barter economy


The amount of money the public wants to hold in the form of cash will decrease if interest rates increase


Banks ability to create money depends on fractional reserve system