《货币银行学》课程授课教案（英文讲义）Chapter 12 Modern Monetary Policy.pdf

to bring about changes in real interest rates that will affect the economic decisions offirms andhouseholds and so return theeconomytothedesired level.Principle #2: Risk (page 573) Rising inflation drives aggregate demand downbecause it increases the uncertainty associated with inflation, making stocks a morerisky investment and reducing wealth.Principle #5: Stability (page 577)Policymakers can avoid them recessions byneutralizing shifts in aggregate demand that arise from other sources.TeachingTips/Student Stumbling BlocksThischapterand the next arethe heart of the newapproach tomacroeconomics,anapproachthatcentersonwhatcentral bankers reallydoIt culminates in a simpler and more realistic macroeconomic model to explainbusinesscyclefluctuationsA section is included below (following the end-of-chapter problems andsolutions) called “The Algebra of Dynamic Aggregate Demand and AggregateSupply"written by Stephen G.Cecchetti, which details theformulation of themodel.Chapter 21 (as well as Chapter 22) are about stability, emphasizing CorePrinciple5.Focus your studentsattention on themonetary policy reactioncurve, including the factors that determine its position, slope, and why it shiftsThey will then be well prepared for the full analysis of economic fluctuationspresented inChapter22,wherethe ability(and limitations)ofmonetarypolicyto control inflation and output fluctuations is discussedApointtostress:Theimportanceofthepropertiesofthemonetarypolicyreaction curve is that the central bank can use these properties to exert controlover the slope and position of the economy's aggregate demand curve.This chapter will lay a foundation for the concept of aggregate demand andhow monetary policy can affect it. Then, in Chapter 22, the concept ofaggregate supply is introduced. With aggregate demand and supply together,you will then be able to explain how to analyze economy-wide equilibrium. Inparticular, you can explicitly point out how the central bank, through itscontrol of the position and slope of the aggregate demand curve, can influenceequilibrium in the economyAlso included in Chapter 21 is a presentation of the idea of the long-run realinterest rate, a key concept in determining the long-run equilibrium of theeconomy. As interest rates show the time value of money, the discussion andanalysis of the long-run real rate is another application of Core Principle 1.Features in this Chapter

to bring about changes in real interest rates that will affect the economic decisions of firms and households and so return the economy to the desired level. Principle #2: Risk (page 573) Rising inflation drives aggregate demand down because it increases the uncertainty associated with inflation, making stocks a more risky investment and reducing wealth. Principle #5: Stability (page 577) Policymakers can avoid them recessions by neutralizing shifts in aggregate demand that arise from other sources. Teaching Tips/Student Stumbling Blocks  This chapter and the next are the heart of the new approach to macroeconomics, an approach that centers on what central bankers really do. It culminates in a simpler and more realistic macroeconomic model to explain business cycle fluctuations.  A section is included below (following the end-of-chapter problems and solutions) called “The Algebra of Dynamic Aggregate Demand and Aggregate Supply” written by Stephen G. Cecchetti, which details the formulation of the model.  Chapter 21 (as well as Chapter 22) are about stability, emphasizing Core Principle 5. Focus your students’ attention on the monetary policy reaction curve, including the factors that determine its position, slope, and why it shifts. They will then be well prepared for the full analysis of economic fluctuations presented in Chapter 22, where the ability (and limitations) of monetary policy to control inflation and output fluctuations is discussed.  A point to stress: The importance of the properties of the monetary policy reaction curve is that the central bank can use these properties to exert control over the slope and position of the economy’s aggregate demand curve.  This chapter will lay a foundation for the concept of aggregate demand and how monetary policy can affect it. Then, in Chapter 22, the concept of aggregate supply is introduced. With aggregate demand and supply together, you will then be able to explain how to analyze economy-wide equilibrium. In particular, you can explicitly point out how the central bank, through its control of the position and slope of the aggregate demand curve, can influence equilibrium in the economy.  Also included in Chapter 21 is a presentation of the idea of the long-run real interest rate, a key concept in determining the long-run equilibrium of the economy. As interest rates show the time value of money, the discussion and analysis of the long-run real rate is another application of Core Principle 1. Features in this Chapter

Your Financial World:Using the Word Inflation (page 554)In normal conversation, when people use the word “inflation"they are talking aboutprice increases.As it is commonly used, the term does not distinguish a one-timechange in the price level from a situation in which prices are rising continuously.Toeconomists, inflation means a continually rising price level, a sustained rise thatcontinuesfor days, months, even years.Tools of the Trade:Measuring Inflation Expectations (page 558)Inflation expectations are central to many economicdecisions.Expected inflationcan be measured by surveying people on their expectations or by looking at the pricesof certain bonds in the financial markets.We can get an estimate of expectedinflation by subtracting the real interest rate on Treasury Inflation ProtectionSecurities from the nominal interest rate on traditional Treasury bonds.Your Financial World: It's the Real Interest Rate that Matters (page 559)High nominal interest rates can be misleading, they fool people into thinking that theirincomes are high.But since high nominal rates almost always result from highinflation, spending all the interest income causes a gradual decline in the purchasingpower of one's savings.To maintain the real purchasing power of their interestincome, retirees can spend only the real return.Applying the Concept:The Remarkable 1990s (pages 577-579)The 1990s were a remarkable decade of unprecedented economic stability.Therearethreepossibleexplanationsfor this phenomenal worldwideeconomic performanceone is just luck, the second is that economies have become more flexible inresponding to external economic shocks, and the third is that maybe monetarypolicymakers have finally figured out how to do their jobs more effectively.Thethird is probably the most likely explanation.In the News:On Presidential Politics, the Fed Walks a Tight Rope (pages 579-580)Most economists dismiss the complaints of both Republicans and Democrats that theFed engages in political favoritism.However, the Fed does try not to start raisinginterest rates in the months before a presidential election, in part to keep frombecoming a political issue.Lessons of the Article: Central bank independence is supposed to freemonetary policymakers from political pressure.Yet it offers only partial

Your Financial World: Using the Word Inflation (page 554) In normal conversation, when people use the word “inflation” they are talking about price increases. As it is commonly used, the term does not distinguish a one-time change in the price level from a situation in which prices are rising continuously. To economists, inflation means a continually rising price level, a sustained rise that continues for days, months, even years. Tools of the Trade: Measuring Inflation Expectations (page 558) Inflation expectations are central to many economic decisions. Expected inflation can be measured by surveying people on their expectations or by looking at the prices of certain bonds in the financial markets. We can get an estimate of expected inflation by subtracting the real interest rate on Treasury Inflation Protection Securities from the nominal interest rate on traditional Treasury bonds. Your Financial World: It's the Real Interest Rate that Matters (page 559) High nominal interest rates can be misleading; they fool people into thinking that their incomes are high. But since high nominal rates almost always result from high inflation, spending all the interest income causes a gradual decline in the purchasing power of one’s savings. To maintain the real purchasing power of their interest income, retirees can spend only the real return. Applying the Concept: The Remarkable 1990s (pages 577-579) The 1990s were a remarkable decade of unprecedented economic stability. There are three possible explanations for this phenomenal worldwide economic performance: one is just luck, the second is that economies have become more flexible in responding to external economic shocks, and the third is that maybe monetary policymakers have finally figured out how to do their jobs more effectively. The third is probably the most likely explanation. In the News: On Presidential Politics, the Fed Walks a Tight Rope (pages 579-580) Most economists dismiss the complaints of both Republicans and Democrats that the Fed engages in political favoritism. However, the Fed does try not to start raising interest rates in the months before a presidential election, in part to keep from becoming a political issue. Lessons of the Article: Central bank independence is supposed to free monetary policymakers from political pressure. Yet it offers only partial

protection,especiallybeforeapresidential election.Thehigherthelevel ofoutputand employment, the more likely an incumbent president is towinreelection.But increases in interest rates slow the economy, reducingaggregate demand.Thus, raising interest rates just before an election—even ifdoing so is justified by economic conditionsputs the central bank on acollision coursewith politicians.Additional Teaching ToolsWho is the moneyman everyoneloves?According to this article from The WallStreet Journal ("Alan Greenspan: The Money Man Everyone Loves," by GeorgeMellon, May 25, 2004) it's the Chairman of the U.S.Federal Reserve.The articlerelates how Mr.Greenspan has been appointed by both Republican and Democraticpresidents and details some of the crises that he has faced in his tenure.Mellonwrites,“ClearlyMr.Greenspan has been as skillful at playingthe hugeFederalReserve pipe organ as he once was playing the sax, keeping the economy liquid andboth interest rates and inflation at remarkably low levels."In the July 1,2004 issue of The Wall Street Journal, G. Thomas Sims writes about theECBreaction totheFed'smove(“ECB Isn't LikelytoFollowFed MoveAnd RaiseRates"),explaining that theECB would“like to raise ratesto stem inflation, but doingso could spell a quick end to the euro zone's sluggish growth."The article makesclear the ECB's dilemma, pointing out that the ECB has missed its inflation target infour of the past five years" but that an increase in rates to stamp out inflation couldcrush an incipient recovery that's so slow in coming."VirtualToolsHere's a site with good links for information on inflation rates and purchasing power:http://eh.net/hmit/Learn more about the effects of inflation on this page, How much is that?" whichallowsyou to entermoneyvalues from thepast and find out howmuch they areworthtoday and vice versa:http:/www.eh.net/ehresources/howmuch/dollarq.phpFor More DiscussionHow important is consumer confidence?Do consumers really change their spendingpatterns based on their expectations about the economy?

protection, especially before a presidential election. The higher the level of output and employment, the more likely an incumbent president is to win reelection. But increases in interest rates slow the economy, reducing aggregate demand. Thus, raising interest rates just before an election—even if doing so is justified by economic conditions—puts the central bank on a collision course with politicians. Additional Teaching Tools Who is the money man everyone loves? According to this article from The Wall Street Journal (“Alan Greenspan: The Money Man Everyone Loves,” by George Mellon, May 25, 2004) it’s the Chairman of the U.S. Federal Reserve. The article relates how Mr. Greenspan has been appointed by both Republican and Democratic presidents and details some of the crises that he has faced in his tenure. Mellon writes, “Clearly Mr. Greenspan has been as skillful at playing the huge Federal Reserve pipe organ as he once was playing the sax, keeping the economy liquid and both interest rates and inflation at remarkably low levels.” In the July 1, 2004 issue of The Wall Street Journal, G. Thomas Sims writes about the ECB reaction to the Fed’s move (“ECB Isn’t Likely to Follow Fed Move And Raise Rates”), explaining that the ECB would “like to raise rates to stem inflation, but doing so could spell a quick end to the euro zone’s sluggish growth.” The article makes clear the ECB’s dilemma, pointing out that the ECB has missed its inflation target “in four of the past five years” but that “an increase in rates to stamp out inflation could crush an incipient recovery that’s so slow in coming.” Virtual Tools Here’s a site with good links for information on inflation rates and purchasing power: http://eh.net/hmit/ Learn more about the effects of inflation on this page, “How much is that?” which allows you to enter money values from the past and find out how much they are worth today and vice versa: http://www.eh.net/ehresources/howmuch/dollarq.php For More Discussion How important is consumer confidence? Do consumers really change their spending patterns based on their expectations about the economy?

ChapterOutlineI.Output and Inflation in the Long Runa.Potential Output1. Potential output is what the economy is capable of producing when itsresources are used at normal rates.2.Potential output is not a fixed level, because the amount of labor andcapital in an economy can grow, and improved technology can increase theefficiency of the production process.3.Unexpected events can push current output away from potential output,creating an output gap; if current output is greater than potential output, itis an expansionary gap and if it is less then there is a recessionary gap.4.In thelong run, current output equals potential output.b. Long-Run Inflationi.In the long run, since current output equals potential output, real growthmust equal growth in potential output.ii.Ignoring changes in velocity, in the long run, inflation equals moneygrowth minus growth in potential output.II.Money Growth, Inflation, and Aggregate DemandAggregate demand tells us how spending by households, firms, thegovernment, and foreigners changes as inflation goes up and downThelevel of aggregatedemand is tied to monetary policythrough the2equation of exchange (MV=PY) because the amount of money in theeconomy limits the ability to make payments.3. Rearranging the equation of exchange results in an expression that tells usthat aggregate demand (Y) equals the quantity of money times velocitydivided by the price level.4.From this expression it is clear that an increase in the price level reducesthe purchasing power of money,which means less purchases are made,pushing down aggregate demand.To shift thefocus to inflation, we need tolook at changes in theprice5.level.Suppose that inflation exceeds money growth (with velocity held constant).6.Real money balances will fall and so will aggregate demand.7. 0Because real money balances fall at higher levels of inflation, resulting ina lower level of aggregate demand, the aggregate demand curve isdownward sloping.8.Changes in the interest rate also provideamechanismforaggregatedemand to slope down

Chapter Outline I. Output and Inflation in the Long Run a. Potential Output 1. Potential output is what the economy is capable of producing when its resources are used at normal rates. 2. Potential output is not a fixed level, because the amount of labor and capital in an economy can grow, and improved technology can increase the efficiency of the production process. 3. Unexpected events can push current output away from potential output, creating an output gap; if current output is greater than potential output, it is an expansionary gap and if it is less then there is a recessionary gap. 4. In the long run, current output equals potential output. b. Long-Run Inflation i. In the long run, since current output equals potential output, real growth must equal growth in potential output. ii. Ignoring changes in velocity, in the long run, inflation equals money growth minus growth in potential output. II. Money Growth, Inflation, and Aggregate Demand 1. Aggregate demand tells us how spending by households, firms, the government, and foreigners changes as inflation goes up and down. 2. The level of aggregate demand is tied to monetary policy through the equation of exchange (MV=PY) because the amount of money in the economy limits the ability to make payments. 3. Rearranging the equation of exchange results in an expression that tells us that aggregate demand (Y) equals the quantity of money times velocity divided by the price level. 4. From this expression it is clear that an increase in the price level reduces the purchasing power of money, which means less purchases are made, pushing down aggregate demand. 5. To shift the focus to inflation, we need to look at changes in the price level. 6. Suppose that inflation exceeds money growth (with velocity held constant). Real money balances will fall and so will aggregate demand. 7. Because real money balances fall at higher levels of inflation, resulting in a lower level of aggregate demand, the aggregate demand curve is downward sloping. 8. Changes in the interest rate also provide a mechanism for aggregate demand to slope down