DRThornhill1@Verizon.

Net
Final- May 13, 2011

4/27/11
Monetary Policy
I. Money Supply
a. Monetarist- believe money supply is key
i. Monetary growth rule- increases rate of money at a constant rate
ii. Believe money supply should grow every year at 3.5% no matter
what condition the economy is in
II. Interest Rate
a. Feds- believe interest rate is key
III. Market Bubble- an item’s price exceeds its true value
a. $5.00 stock is being bought for $15.00 a share
b. Before bubble- 30% foreclosure
c. After bubble- 70% foreclosure
IV. Negative Equity- the value of an asset used to secure a loan is less than the
outstanding balance on the loan
V. Loans
a. Used to be banks give 80% for 20% down, now give 95% for 5% down
b. Prime People- people with good credit; less credit risk
c. Alt A- bad credit; high risk
d. Subprime- group of alt-a people
VI. TARP (bailout)
a. Oct 2008
b. Trouble Asset Relief Program
c. Congress/President gave $ trillions to banks
i. Bought shares of stock in banks
ii. Banks are slowly paying back with interest

REVIEW
Monetary Policy- Ch. 26
I. Monetary policy- Federal Reserve manages money supply and interest rates
to pursue macroeconomic goals
a. Feds 2 main monetary targets are money supply and interest rates
II. Fed Fund rate- rates banks charge other bank overnight loan
a. If rates go up, it is passed on to consumers
III. Expansion policy- increase money supply/ decrease interest rate
IV. Contractionary Policy- decrease money supply/ increase interest rate
V. Monetarist- believe Feds should use money supply rather than interest rates
for policy
VI. Monetary growth rule- money supply grows at constant rate regardless of
condition of economy
VII. TARP (bailout)- October 2008, Congress enabled Feds give banks funds for
stocks
a. First time this happened
VIII. Subprime and Alt A- borrowers with flawed credit history or no credit
a. Banks loaned them money in 2005-2006
IX. Negative Equity- you owe more on your house than you paid for it

I
n
t
e
r As interest rate goes up, demand for
e money goes down.
s
t NEGATIVE SLOPE

R
a
t D
e

Demand for Money