Chapter 21 Money & Banking

Since prices are _________, monetary policy will not have an immediate effect on current or expected inflation.

sticky in the short run

Factors that Cause the MP Curve to Shift Down

Increase in the target inflation rate, decrease in the autonomous real interest rate.

The ________ says the central bank should respond to an increase in the inflation rate by raising the nominal interest rate enough that the real interest rate also increases.

Taylor principle

_____ controls the federal funds rate, its primary policy instrument, by adjusting the level of reserves in the banking system.

The Fed

The IS curve shows the relationship between aggregate output and the ________.

real interest rate when the goods market is in equilibrium

A reduction in the federal funds rate by the Fed will lower the ______, which will stimulate output by ________.

real interest rate. raising investment and net exports.

Factors that shift the MP curve *down* and the aggregate demand curve *up*

A decrease in autonomous real interest rate ([ ↓→r↓→(I↑ & NX↑)→Y↑]), An increase in the the target inflation rate ([π*↑→r↓→(I↑ & NX↑)→Y↑])

______ is the total output demanded at different inflation rates.

Aggregate demand

Factors that shift *both* the IS and Aggregate demand curve to the *right*

Increase in: consumption, investment, spending, net exports. Decrease in: Taxes, financial frictions.

The MP curve shows the relationship between the real interest rate, and the ______.

Inflation rate.

A movement along the MP curve represents the central bank's automatic __________.

adjustment of interest rates when inflation changes

Higher inflation is represented by an _____ along the aggregate demand curve

Upward movement. (increase)

The Fed follows a nominal interest rate rule where monetary policy responds _____.

to inflation (π)