FTC1 Ch. 17

A negative output gap that results in lost output and unemployment above the natural unemployment rate?

a recessionary gap

The Fed's monetary policy objectives has what two distinct parts?

a statement of goals and a prescription of the means by which to pursue the goals

The Fed's goals are often described as a "dual mandate" to?

achieve stable prices and also maximum employment

Although rules beat discretion, there are three alternative rules that the Fed might have chosen. They are?

1. An inflation targeting rule, 2. A money targeting rule, and 3. Nominal GDP targeting rule

The ripple effects that follow a change in the federal funds rate changes what three components of aggregate expenditure?

1. Consumption expenditure, 2. Investment, and 3. Net exports

A decision rule for monetary policy that sets the policy instrument by a formula based on the current state of the economy?

Instrument rule

Two alternative decision-making strategies might be used by a central bank and they are summarized as what two alternative rules?

Instrument rule and Targeting rule

What is the long-term corporate bond rate?

It is the interest rate that businesses pay on the loans that finance their purchases of new capital and that influences their investment decisions.

A variable that the Fed can directly control or closely target and that influences the economy in desirable ways?

Monetary policy instrument

A monetary policy rule that adjusts the interest rate to achieve a target growth rate for nominal GDP?

Nominal GDP targeting

A decision rule for monetary policy that sets the policy instrument at a level that makes the central bank's forecast of the ultimate policy goals equal to their targets?

Targeting rule

What is the mandate of the Federal Reserve Act?

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy's long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

A monetary policy strategy in which the central bank makes a public commitment to achieving an explicit inflation target and to explaining how its policy actions will achieve that target?

Inflation targeting

A monetary policy that is based on an expert assessment of the current economic situation?

Discretionary monetary policy

The interest rate at which banks can borrow and lend reserves in the federal funds market?

Federal funds rate

A situation in which financial markets and institutions function normally to allocate capital resources and risk?

Financial stability

What makes the Board of Governors of the Federal Reserve System and the Federal Open Market Committee (FOMC) responsible for the conduct of monetary policy?

The Federal Reserve Act

What is the most significant interest rate to be influenced by the federal funds rate?

The long-term corporate bond rate

The percentage deviation of real GDP from potential GDP, summarizes the state of aggregate demand relative to potential GDP?

The output gap

A positive output gap that brings rising inflation?

an inflationary gap

The goal of "maximum employment" means?

attaining the maximum sustainable growth rate of potential GDP, keeping real GDP close to potential GDP, and keeping the unemployment rate close to the natural unemployment rate.

The annual percentage change in the Personal Consumption Expenditure deflator (PCE deflator) excluding the prices of food and fuel?

core inflation rate

What is the formal role of the President of the United States related to the Board?

is limited to appointing the members and the Chairman of the Board of Governors

A monetary policy rule that makes the quantity of money grow at k percent per year, where k equals the growth rate of potential GDP?

k-percent rule

The goal of "stable prices" is interpreted to mean?

keeping the inflation rate low and predictable

The Fed pays close attention to the business cycle and tries to steer a steady course between inflation and recession. To gauge the state of output and employment relative to full employment, the Fed looks at a large number of indicators that include?

the labor force participation rate, the unemployment rate, measures of capacity utilization, activity in the housing market, the stock market, and regional information gathered by the regional Federal Reserve Banks. All these data are summarized in the Fed's Beige Book.

In the long run, demand and supply in the loanable funds market depend only on what real forces?

on saving and investment decisions

On the average, after the Fed takes action to change the course of the economy, real GDP begins to change about?

one year later

Congress plays no role in making monetary policy decisions, but the Federal Reserve Act requires the Board of Governors to?

report on monetary policy to Congress

When the Fed raises the federal funds rate, the economy slows and when the Fed cuts the federal funds rate, the economy?

speeds up

The inflation rate responds with a longer time lag that averages around?

two years