A typical adult human lung contains about 300 million tinycavities called alveoli. Estimate the average diameter ofa single alveolus.
Chapter 15: Interest Rates and Monetary Policy Interest Rates The price paid for the use of money It represents two things: o Cost of borrowing o Reward for lending Many different interest rates Speak as if only one interest rate Determined by the money supply and money demand Demand for money o Why hold money o Asset demand, Da Money as a store of value Varies inversely with the interest rate o Total money demand, Dm Equilibrium Interest Rates o Changes with shifts in money supply and money demand o We will focus on changes of money supply because that’s all the FED has control over o FED can influence supply of money by using tools of monetary policy o Tools of monetary policy Open market operations (conducted by NY FED) Open market purchase: FED buying treasury bonds from banks o FED pays for securities by giving reserves to banks (excess reserves). Banks make loans with these reserves. Multiple deposits will be created (multiple deposit expansion through money multiplier) and money supply increases Open market sale: FED sells securities to banks o Banks pay with reserves. Effectively FED takes out reserves from the banking system. Leads to multiple deposit contraction, money supply shrinks If bank gets fresh reserve money instead of securities then money increases The reserve ratio Changes the money multiplier (1/r) Lowering reserve ratio, increases money multiplier, increases money supply Increasing reserve ration, decreases money multiplier, decreases money supply The discount rate The FED acts as lender of last resort Interest rates on short-term loans granted by FED Increasing discount rate, discourages banks from borrowing; money supply shrinks Open market operations are most important (could sell/buy little or a lot) most common Reserve ratio last changed 1992 Discount rate is a passive tool Monetary Policy o Expansionary monetary policy (easy money) Economy faces recession Fed buys securities Lowers reserve ratio Lowers discount rate o Restrictive monetary policy (tight money) Slow down/ periods of rising inflation Fed sells securities Increases reserve ratio Raises discount rate An increase in money supply will reduce interest rates, and increase investment and GDP Monetary policy, GDP, and price level o Effect on real GDP and price level o Cause-effect chain Money supply changes interest rates Which in turn changes investment and consumption spending Real GDP and price level respond Which of the following chain of events would signal that the fed is pursuing tight money Interest rates rise and investment falls Monetary Policy in Action o Advantages over fiscal policy (taxes and government spending) Speed and flexibility Isolation from political pressure Monetary policy is more subtle than fiscal policy o Fiscal policy is conducted by congress over the president. Fed is responsible over monetary Federal funds rate o Rate banks charge each other on overnight loans o Easy for the fed to target o To lower federal funds rate, fed increases bank reserves by conducting open market purchase o To raise federal funds rates, fed decreases bank reserves by conducting open market sale Recent U.S. monetary policy o Highly active in recent decades o Responded with quick and innovative actions during the recent financial crisis and the severe recession o Quantitative Easing (QE) or asset purchase program Fed bought trillions worth of securities from the banks o Critics contend the fed contributed to the crisis by keeping the federal funds rate too low for too long Problems and complications o Lags Recognition and operational Price level is reported monthly GDP data is reported quarterly (and often revised) It takes 3-6 months for interest rates to affect investment spending and economy activity Liquidity Trap Pumping reserves may not solve the problem if banks are not willing to lend and households/businesses are not willing to borrow Despite historical low interest rates (real interest rates are actually negative) investment spending stil remained low Fed’s “Exit Strategy": how exactly doe the fed plan to drain the banking system of reserves in case it needs to slow down the economy or in case inflation picks up