Week 11 — Monetary Policy, Interest Rates & Aggregate Demand

Why this matters

A bakery owner pricing an oven loan and a construction worker waiting on a new apartment project both feel this week's ideas.

In plain language

This week connects the central bank's bond trades to jobs, prices, and output. The path runs through borrowing. When the central bank adds money, interest rates fall, and businesses and families borrow and spend more. That chain of steps is the transmission mechanism (the series of links that carries a central-bank move out to the whole economy). By the end of the week you can say all five links in order, size each one with the course's numbers, run the chain backward, and explain why economists argue about how often a central bank should use it.

• Already covered: Week 10 showed how the Fed's bond trades set an interest rate in the money market.
• This week: the five links from the money supply to aggregate demand, lags, and the fine-tuning versus rules debate.
• How they connect: last week's new interest rate becomes this week's first link.
• Where we're going next: Week 12, Inflation, the Phillips Curve & Expectations.

Focus

How does a central bank's bond trade reach jobs, prices, and output?

By the end of this module, you should be able to:

• [ ] say the five links of the transmission mechanism in order
• [ ] size the investment and output links with the right multiplier
• [ ] reverse every link for contractionary policy
• [ ] weigh fine-tuning against rules fairly

To-do

Plan your week

1. Read Chapter 11 (45 minutes), then the lecture and slides.
2. Work the tutorial (60–90 minutes) and practice set (20 minutes).
3. Do the Model Workshop (90 minutes), discussion, and assignment.
4. Take the quiz.

This week's checkpoint: a rate cut from 6% to 4%, 20 per point, and a multiplier of 5.

You've got this

Take it one link at a time, and ask your instructor early.

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