quiz four (chapter 13)

What are the twin goals of monetary policy?

Maximize employment and stable prices with moderate long-term interest rates.

What is the Fed’s primary tool?

To adjust the FFR.

Why are interest rates important?

They affect the way we borrow and consume.

What is aggregate demand?

Consumption + Investment + Government Purchases + Net Exports

What happens from a reduction in interest rates?

Promotes greater consumption and demand, shifting aggregate demand to the right.

Loosening Monetary Policy

Reducing interest rates → increase consumption and investment → increases aggregate demand

Tightening Monetary Policy

Raising interest rates → decreases consumption and investment → decreases aggregate demand

Expansionary Monetary Policy

Fed actions designed to decrease interest rates in order to increase aggregate demand in the economy.

Lower Interest rates =

Less people save

Lower interest rates =

Borrowing is less expensive

Contradictory Monetary Policy

Fed actions designed to increase interest rates in order to decrease aggregate demand in the economy, usually to fight inflation.

Who implements monetary policy?

The Fed

Why is the LRAS curve vertical?

Economic output is always fixed in the long run at the full employment output when wages and prices are flexible.

What can shift the LRAS curve?

Factors that increase the productivity of inputs. (Labor Force, Technology, Natural Resources..)

Why is SRAS upward sloping?

Higher prices can cause temporary increases in output due to sticky wages and prices.

Equation of Exchange

M x V = P x Q

What parts of the equation of exchange are assumed to be fixed?

Velocity and real aggregate output.

Money Illusion

A misperception of wealth caused by a focus on increases in nominal income but not increases in prices

“Sticky”

Delayed reaction in wages to economic conditions

Liquidity Trap

When interest rates are very low, people hold money rather than invest in bonds due to their expectation of a declining economy or an unforeseen event such as war.

Keynesian Model

Aggregate demand is the primary driving force of an economy

Monetarist Model

Money supply directly affects price level

Long Run

Classical economist saw no use for monetary policy because in the long run, the economy would self correct

Demand Shock

Shifts AD to the left due to reductions in consumer demand, investment, gov purchases, or exports

Monetary Rule

Keeps the growth of money stocks on a steady path, following the equations of exchange to set a long-run path for the economy that keeps inflation in check

Inflation targeting

The central bank sets a target inflation and adjusts monetary policy to keep inflation near that target

Taylor Rule

Federal Fund Target Rate = Target Inflation Rate + Current Inflation Rate + 1/2(Inflation Gap) + 1/2(Output Gap)

Monetary Hawks

A policymaker who advocated for monetary policies that emphasize keeping inflation low as its top priority

Monetary Doves

A policymaker who advocated for monetary policies that emphasize low unemployment and high growth as its top priorities.