Money supply/quantity of money

<< When the fed decreases the supply of money, it means banks have less money to loan. The supply of money curve shifts to the left. As a result, interest rates increase. When interest rates increase, the demand for money decreases (movement and not a shift). The result is equilibrium. >> exactly – FED SELLS BONDS TO LOWER MONEY SUPPLY, LOWER MONEY SUPPLY = HIGHER RATES AND THUS LOWER DEMAND FOR MONEY B/C SAVINGS IS FALLING

FED LOOSENS MONEY SUPPLY BY BUYING BONDS – THIS LOWERS RATES – THINK OF WHAT FED DID IN EARLY 2000S TO CREATE THE HOUSING BUBBLE – CHEAP CREDIT!!!

(Fisher SU)"“The main operating tool is the FED rate, and not the supply of money. FED rate = interest rate, is how FED keeps inflation in check. That is the main focus of all FED actions = stable price level.”" Although that is true, I don’t believe that CFAI level I books touch on that. The materials, as presented by CFAI, focus on open market operations, discount rate, and reserve reqs. Open markets is the most common, discount rate is 2nd, and reserve req is rarely used. Maybe level II or III focuses on the actual fed rate. I think there is a line or two in CFAI level I books about the actual fed rate and setting the target.

daj224 Wrote: ------------------------------------------------------- > << > When the fed decreases the supply of money, it > means banks have less money to loan. The supply of > money curve shifts to the left. As a result, > interest rates increase. When interest rates > increase, the demand for money decreases (movement > and not a shift). The result is equilibrium. >> > > exactly – FED SELLS BONDS TO LOWER MONEY SUPPLY, > LOWER MONEY SUPPLY = HIGHER RATES AND THUS LOWER > DEMAND FOR MONEY B/C SAVINGS IS FALLING no one wants to save when rates are high and the opportunity cost is high

> exactly – FED SELLS BONDS TO LOWER MONEY SUPPLY, LOWER MONEY SUPPLY = HIGHER RATES AND THUS LOWER DEMAND FOR MONEY B/C SAVINGS IS FALLING Yes, but SAVINGS IS RISING, not FALLING

Dreary Wrote: ------------------------------------------------------- > > exactly – FED SELLS BONDS TO LOWER MONEY > SUPPLY, LOWER MONEY SUPPLY = HIGHER RATES AND THUS > LOWER DEMAND FOR MONEY B/C SAVINGS IS FALLING > > Yes, but SAVINGS IS RISING, not FALLING thanks. I get confused with the savings part. so people wanna save when rates are high(er)…

Think of it in terms of corporations when you think of savings. Corporations want to spend a bunch of money when rates are low b/c it is cheap for them to borrow. Thus the reason of the real estate boom, rates have been so low people borrowed like crazy b/c it was “free money” so to speak.

amberpower Wrote: ------------------------------------------------------- > Think of it in terms of corporations when you > think of savings. > > Corporations want to spend a bunch of money when > rates are low b/c it is cheap for them to borrow. > Thus the reason of the real estate boom, rates > have been so low people borrowed like crazy b/c it > was “free money” so to speak. thanks, that helps me a lot.