Lesson8-11S2.pptVIP

$pg Getting Started – Controversy over Monetary Policy Monetary policy can be, and often is, controversial In the 1970s, the inflation rate rose dramatically with interest rates eventually following The Fed was under pressure to be more accommodative (increase the money supply and keep interest rates low to prevent recession) Battles with Congress took place as the film clip to follow shows Usefulness of Monetary Policy Monetary policy Can be changed quickly Is more flexible and responsive than fiscal policy Therefore, monetary policy is used more actively than fiscal policy to stabilize the economy Portfolio Allocation Holders of wealth must determine the form to hold that wealth Cash, checking account, bonds, real estate, gold, rare coins, jewelry, mutual funds, rare stamps Cash and checking account holdings - money Portfolio allocation decision The decision about the forms in which to hold one’s wealth Expected risk-adjusted rates of return Services provided by holding assets The demand for money is part of the decision Demand for Money The amount of wealth an economic agent desires to hold in the form of money Businesses and individuals must decide how much wealth to hold as money Businesses hold more than half of the total money stock Cost-benefit criterion tells us that an economic agent should increase money holdings if the benefit of doing so exceeds the cost Benefits of Holding Money Benefits of holding money Usefulness in making transactions Store of wealth Factors that affect the demand for money Income Related to volume of transactions Technological and financial innovation Credit card use has decreased money demand Costs of Holding Money Costs of holding money Opportunity costs The interest (or other return) that could have been earned by holding nominal return-bearing assets Bonds are interest-bearing assets Stocks pay a dividend and are expected to appreciate in value Most forms of money pay little or no interest