ch. 13 monetary policy
Contractionary monetary policy
-policy pursued by Fed to decrease AD -increasing nominal interest rates (i) by decreasing MS
Expansionary monetary policy
-policy pursued by Fed to increase AD -decreasing nominal interest rates (i) by increasing MS
1. monetary growth rule 2. inflation targeting 3. the taylor rule
3 types of monetary rules
fiscal
Keynesians believe that in the short run, ____ policy is effective.
monetary
Monetarists believe that in the short run, _____ policy is effective.
expansionary monetary policy
Policy where the Fed purchases bonds in open market operations to push the interest rate lower, leading to more spending and investment
contractionary monetary policy
Policy where the Fed sells bonds in open market operations to push the interest rate higher, slowing down or reducing aggregate demand.
contractionary monetary policy
Used when inflationary pressures build up in the economy
(P x Q)/M
V =
up
When Md > Ms (shortage of money) market forces will try to drive I (down/up)
down
When Ms > Md (surplus), market forces will try to drive I (down/up)
reduces, raises
a negative supply shock ___ output and ____ prices
inflation
classical economists believe that expansionary monetary policy only creates _____
self-adjusts, flexible, price, output, unemployment
classical theory: long run- economy ____ via ___ prices. Money leads only to ____ changes. (No effect on ___ or ____)
monetary, self-adjusts
classical theory: short run- ___ policy is ineffective. economy ____
M x V = P x Q
equation of exchange
full employment
in the classical model, the economy is at _____
monetary growth rule
increasing the money supply by a set percentage each year at a level consistent with long-term price stability and economic growth
long-run equilibrium, higher prices
keynesian theory: long run- economy adjusts to a ____. Increased MS leads to _____.
fiscal, monetary, deep recession
keynesian theory: short run- ___ policy effective, while ___ policy ineffective in times of _____
economic downturns
keynesians believe fiscal policy is more effective during _____
long run equilibrium, higher prices
monetarist theory: long run- economy adjusts to ____. Increased MS leads to _____.
fiscal, consumption, investment, monetary
monetarist theory: short run- ____ policy ineffective because government spending crowds out ____ and _____. _____ policy is effective.
increase, inflation
monetarists believe an increase in money supply will ___ spending in the short run but lead to ___ in the long run
crowding out effect
monetarists believe that the ____ _makes fiscal policy ineffective
is not
monetary policy (is/is not) effective in combatting supply shocks
the fed
money supply (Ms) is determined by:
real
neutrality of money: ____ wage remains the same
monetary policy
policies aimed at controlling the money supply to target interest rates in an economy
money supply, price level
quantity equation shows the relationship between ____ and ___
inflation targeting
setting a target on the inflation rate, usually at around 2% per year, and adjusting monetary policy to keep inflation in that range
Fed funds target rate = 2 + current inflation rate + 1/2(inflation gap) + 1/2(output gap)
taylor rule
money demand
the desire to hold assets in their most liquid form- cash, checking (even savings for M2) rather than other less liquid forms (stocks, real estate, etc.)
lower
the higher the interest rate (i), the ___ the Md
velocity of money
the rate at which money changes hands during a year
theory of liquidity preference
theory that i adjusts to equilibrate Md and Ms
-economic growth with low unemployment -stable prices with moderate long-term interest rates
twin goals of monetary policy
expansionary monetary policy
used in times of economic downturn to boost aggregate demand
AD, right, output, prices
when a demand shock pushes output below long-run equilibrium, monetary policy can shift ___ back to the ___ and restore long run ___ and ____
decrease
when the fed wants to increase interest rates, they ___ the Ms
