Federal Reserve Monetary Policy Review

These flashcards cover key concepts related to the Federal Reserve's monetary policy, including tradeoffs, interest rates, and responses to economic changes.

What are the Federal Reserve's monetary policy goals?

Ensuring banks can meet profit maximization objectives, discount rate stability, zero percent unemployment, and price level stability.

In the short run, what tradeoff does the Federal Reserve face?

Inflation and unemployment.

When the output gap is positive, it represents a(n) gap, and when it is negative, it represents a(n) gap.

inflationary; recessionary.

Who controls monetary policy?

The Federal Reserve.

What is the federal funds rate?

The interest rate that banks charge each other on overnight loans.

What do Federal Reserve open market operations directly influence?

Banks.

Why does the Fed buy U.S. government securities from banks?

To lower the federal funds rate.

How do long-term interest rates compare to short-term interest rates?

Long-term interest rates are higher because long-term loans are riskier.

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

More than short-term interest rates.

If the Fed wants to decrease the quantity of money, what can it do?

Sell U.S. government securities.

In the short run, what effect does an increase in the federal funds rate have on the real interest rate and investment?

Raises the real interest rate and decreases investment.

What happens in the aggregate supply-aggregate demand model when the federal funds rate is raised?

Decreases aggregate demand.

What occurs when the Fed lowers the federal funds rate during a recession?

Real GDP and the price level will both increase.

What describes the Fed's actions to fight a recession?

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

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

Raise the federal funds rate to decrease aggregate demand.

What occurs as a result of an open market purchase of government securities by the Fed?

An increase in investment.

When the Federal Reserve fights inflation, what happens to the supply of loanable funds curve?

It shifts leftward, and the aggregate demand curve shifts rightward.

If the Fed increases the federal funds rate and engages in quantitative tightening, what happens to the equilibrium?

The new equilibrium is point D.

Which aggregate supply-aggregate demand diagram shows the effect on real GDP and price level of monetary policy during a recession?

Only Figure A.

What would the Fed do to offset an increase in aggregate demand that shifts the curve from AD0 to AD2?

Raise the federal funds rate and engage in quantitative tightening.