In this chapter, we have examined the effects of money and monetary policy on
the economy. We first analyzed the role of money in the banking system. We then
discussed the role of the Federal Reserve and its tools for implementing monetary
policy. Next we developed a model of the money market, analyzing both the
demand and the supply of money. We showed how an equilibrium interest rate
resulted in the money market and how that rate could change. Changes in interest
rates affect managerial decisions because they influence the cost of borrowing
for the firm and they change consumer spending patterns.
We are now ready to develop the overall aggregate macroeconomic model that
integrates the real and monetary sides of the economy and helps managers understand
how changes in the macro environment affect their competitive strategies
(Chapter 14).