Federal Reserve Monetary Policy

These flashcards cover key concepts regarding the Federal Reserve's monetary policy, its tools, and the effects of its actions on the economy.

What are the Federal Reserve's monetary policy goals?

Ensure price level stability, discount rate stability, and aim for zero percent unemployment.

What tradeoff does the Federal Reserve face in the short run?

Inflation and unemployment.

What does a positive output gap represent?

An inflationary gap.

Who controls monetary policy in the United States?

The Federal Reserve.

What is the federal funds rate?

The interest rate banks charge each other on overnight loans.

What do Federal Reserve open market operations influence?

They directly influence banks.

What is the result of the Fed buying U.S. government securities from banks?

It lowers the federal funds rate.

Why are long-term interest rates higher than short-term interest rates?

Because long-term loans are riskier.

How do long-term interest rates fluctuate compared to short-term interest rates?

Sometimes less than, sometimes more than.

What can the Fed do to decrease the quantity of money?

Sell U.S. government securities.

What happens if the Fed increases the federal funds rate in the short run?

It raises the real interest rate and decreases investment.

What initial effect does raising the federal funds rate have in the aggregate supply-aggregate demand model?

It decreases aggregate demand.

What happens to real GDP and the price level if the Fed lowers the federal funds rate during a recession?

Both real GDP and the price level will increase.

How does the Fed typically fight a recession?

Lower the federal funds rate target, buy government securities, and increase aggregate demand.

If the Fed is concerned with inflation, what will it do to the federal funds rate?

It will raise the federal funds rate to decrease aggregate demand.

What is the outcome of an open market purchase of government securities by the Fed?

An increase in investment and a decrease in the real interest rate.

What happens when the Federal Reserve fights inflation?

The supply of loanable funds curve shifts leftward and the aggregate demand curve shifts rightward.

What occurs if the Fed increases the federal funds rate and engages in quantitative tightening?

The new equilibrium is determined by the shift reflected on the aggregate demand-aggregate supply diagram.

Which diagram shows the effect on real GDP and price level of monetary policy when used to fight a recession?

Figure A.

If the Fed wants to offset an increase in aggregate demand, what should it do?

Raise the federal funds rate and engage in quantitative tightening.