00:01
The federal reserve controlling the real interest rate has the key underlying assumption that the fed is able to control the money supply.
00:12
And this assumption makes sense because if the federal reserve were to, let's actually, let's suppose that demand is unchanged, for an example.
00:26
Now, suppose that the federal reserve were to engage in the open market operations and they were to sell securities.
00:33
So if the federal reserve is selling securities, they're thereby going to be decreasing the money supply.
00:40
Because people and firms are going to be purchasing these from them, so the money supply is going to decrease.
00:46
As a result of this, we're going to see an increase in the real interest rate.
00:50
Now, if the opposite were to happen, if the federal reserve were to purchase or buy securities, they're thereby going to be increasing the money supply because they're going to be injecting these funds into the economy that they used to purchase the securities with.
01:03
As a result, we're going to see a decrease in the real interest rate.
01:06
And if that doesn't make sense, we can look at this really simplistically with a basic supply and demand curve.
01:11
So we have quantity on the x -axis, price on the y -axis, and then we have our demand curve...