Chapter 15 part 3

Inflation Rate is 4% and GDP gap is 1%. FFRT =

(1.5 x 4) + (0.5 x 1) + 1 = 7.5 = 7.5%

Taylor Rule: Federal Funds Rate Target =

(1.5 x Inflation Rate) + (0.5 x GDP Gap) +1

Monetary Policy

Changes in the MONEY SUPPLY to achieve macroeconomic goals.

When Quantity Demanded of money Decreases, bond issuers must:

Raise the Interest they pay to sell bonds

Keynes argued that:

if an economy is in a Liquidity Trap, the government should use FISCAL policy to Stimulate the economy, which will shift the AD curve to the Right

The Fed Funds Rate Target measures:

the percentage deviation of Real GDP from its Potential Level

Activists and Nonactivists mainly debate over:

-Time for Adjustment -Effectiveness of Monetary Policies -Flexibility of Monetary Policies

When the Fed sells bonds:

1. The amount of Money Supply Decreases, 2. driving Interest Rates up, which 3. causes business to Invest Less. 4. The result is: -Decrease in AD -NO CHANGE IN EQUILIBRIUM PRICE LEVEL -Decrease in Equilibrium level of GDP

Changes in Money Supply affect:

Absolute Prices and Relative Prices

If there's More money in the financial system, the Quantity of Interest-bearing financial assets such as bonds Demanded INCREASES, which means that:

Bond issuers can issue bonds at Lower Interest Rates and still sell bonds

Keynes simple description:

Changes in the Money Market Travel to GDP Market

Keynes Inflationary Bias

Expansionary policies are implemented to move a point from a Recessionary equilibrium to a point of equilibrium with Real GDP in which the SRAS curve shifts Left, downwards along the AD curve.

Inflation Rate Target Approach

Fed undertakes monetary policy actions to keep actual inflation rate near or at its target

DO NOT express %'s as decimals in:

Federal Funds Rate Target = (1.5 x Inflation Rate) + (0.5 x GDP Gap) + 1 Write the %'s as WHOLE NUMBERS!!!

Monetarist Transmission: Fed wants to do contractionary policy:

Money Market: ONLY SUPPLY goes down (shifts left) AD and SRAS: ONLY AD goes down (shifts left)

Nominal GDP Targeting

Pushed by Market Monetarists: the Fed should set a Nominal GDP target such as a rise from 5% to 6% and adjust growth of the Money Supply to hit the target

If there's less money in the financial system, the _ of money Decreases.

Quantity Demanded

Taylor Rule: If Real GDP Rises 1% above Potential GDP, the Fed should:

Raise the Federal Funds Rate Target by 0.5% (1% x 0.5)

Taylor Rule: If Inflation rises by 1%, the Fed should:

Raise the Federal Funds Rate Target by 1.5% (1% x 1.5)

Gold Standard

Setting an official Price Level that helps stabilize the economy

Unlike the Constant Money Growth Rate and Predetermined Money Growth Rate rules, the Taylor Rule IS NOT:

a derivation of the Equation of Exchange

Monetarists DO NOT believe _ depends on Interest Rate effects, but Keynesians do.

effectiveness of Money Supply

Market Monetarists argue that recessions happen because:

monetary policy is too "tight", or contractionary