Macro Final: Chapter 17

Fed's Operational Goals 1) Operational "___ Employment" Goal 2) The Fed looks at a number of economic indicators to gauge the state of __ and ____ relative to full employment

1) Maximum 2) GDP; employment

1) monetary base= 2) ____ of federal reserve - federal fund rate- the rate that banks loan to one another

1) coins + federal notes + banks reserves at fed 2) liabilities

• Equilibrium in the market for bank reserves 1) The equilibrium federal funds rate is determined at the point where the ____ for bank reserves equals the ___ of bank reserves. 2) The equilibrium federal funds rate determines the Fed's target ___ ___ __ Graph #j

1) demand; supply 2) federal funds rate.

Responsibility for Monetary Policy 1) The FOMC makes monetary policy decisions at ___ scheduled meetings a year. 2) The Fed (not the Congress or the President) has ultimate ___ for monetary policy

1) eight 2) responsibility

What does the Fed do when it wants to change its target for the federal funds rate? - it has to conduct an open market operation. - Example: If the Fed wants to lower the federal funds rate, the Fed undertakes an open market purchase of government securities. - This increases the quantity of bank reserves and the federal funds rate falls

-Similarly, if the Fed wants to raise the federal funds rate, the Fed undertakes an open market sale of government securities. -The quantity of reserves decreases and the federal funds rate rises.

example #3, graph #G The federal reserve in response to the Covid-19 pandemic lowered the discount rate at the discount window from 1.75-0.25%. draw the MONEY MARKET graph to show the effects on the equilibrium nominal interest rate

-banks can borrow more money from fed -banks lending increases since excess reserves increase

difference between the nominal interest rate and real interest rate?

-real interest rate takes account of inflation (nominal int rate - inflation rate)

example- #graph k 1) if the fed wants to lower the federal funds rate, the fed undertakes an open market ____ of gov securities 2) If fed wants to increase bank reserves, Fed government buys bonds which drives interest rate ___ and curves curve to the ____

1) purchase 2) down; right

Choosing a Policy Instrument 1) A monetary policy instrument is a variable that the Fed can directly ___ or closely ____ and that influences the economy in desirable ways. -Fed controls quantity of monetary base and federal funds rate. The choice is the federal funds rate.

control; target

• Supply curve for bank reserves (RS): Graph #i ─ The Fed's open market operations determine the supply of reserves. ─ What happens to the supply of bank reserves if the Fed conducting an open market purchase of government securities?

it decreases

1) if the fed believes that real GDP is less than potential GDP, the fed will undertake a... 2) what kind of gap is this? what does the fed do? 3) they will lower the __ __ __ -To make this happen, the New York Fed buys government securities in the open market which increases bank reserves. This lowers the federal funds rate to 3 percent, the Fed's new target rate what will banks do? 4) Bank reserves have increased so banks now have excess reserves. Banks loan the excess reserves which ___ the quantity of loans and the quantity of money in the economy. The short-term interest rate ___.

1) expansionary fiscal policy 2) recessionary 3) federal funds rate 4) increases; falls

2. Monetary Policy Transmission How does the Fed Fight Recession? 1) If the Fed believes that real GDP is less than potential GDP, the Fed will undertake __ __ __ 2) It ____ the federal funds rate using an open market purchase. -The monetary policy is transmitted as outlined above.

1) expansionary monetary policy. 2) lowers

demand for reserves- The RD curve 1) the quantity of reserves that banks are willing to hold varies with the... 2) the higher the federal funds rate, the _____ the quantity of reserves that banks plan to hold 3) why? the __ __ for banks to hold reserves increases

1) federal funds rate 2) smaller 3) opportunity cost

The Market for Bank Reserves • Demand curve for bank reserves (RD) 1) The higher the federal funds rate, the greater is the opportunity cost for banks to _____ these reserves rather than ____ these reserves. 2) So the higher the federal funds rate, the ____ the quantity of reserves ____ 3) The demand curve for reserves is ____ sloping. #Graph H

1) hold; loaning 2) smaller; demanded 3) downward

impact on aggregate demand 1) consumption expenditure ___ since there is a lower interest rate 2) since there was a fall in interest rate, the US dollar ___ 3) net exports ____ as a result of US dollar depreciating 4) The increase in consumption expenditure, investment, and net exports, increases aggregate demand so that the AD curve shifts rightward, this causes the ___ ___ 5) since there is an increase in aggregate demand, the equilibrium price level ___ and equilibrium real GDP ___ -recessionary gap is reduced

1) increase 2) depreciates 3) increases 4) multiplier effect 5) rises; rises

Monetary Policy Objectives 1) The goals in the mandate are "of maximum employment, stable prices, and moderate long-term ___ ___." 2) Achieving stable prices and keeping the _____ rate low, is the key. It is the source of ___ employment and moderate long-term interest rates. 3) Since the nominal interest rate equals the __ __ __ plus the __ __, a low inflation rate means ____ long-term interest rates. 4) Financial _____- a situation in which financial markets and institutions function normally to allocate capital resources and risk - is a prerequisite for attaining the Fed's goals.

1) interest rates 2) inflation; maximum 3) real interest rate; inflation rate; low 4) stability

How Does the Fed Hit the Federal Funds Rate Target? 1) The Fed uses ___ ___ operations to hit its federal funds target rate. 2) An Open Market Purchase: The Fed ___ government securities from a bank and pays for the purchase by ___ the bank's ____. 3) An Open Market Sale: The Fed ____ government securities to a bank and receives payment for the sale by _____ the bank's reserves. The federal funds rate is determined in the market for bank reserves, which we discuss next

1) open market 2) buys; increasing; reserves 3) sells; decreasing

1) The Fed tracks the output gap, the percentage deviation of ___ ___ from ___ ___. 2) A positive output gap leads to ____; a negative output gap results in ____. The Fed tries to minimize the output gap. 3) The Fed pays attention to the core inflation rate, which is the annual percentage change in the __ ___ ___ deflator excluding the prices of food and fuel.

1) real GDP; potential GDP 2) inflation; unemployment 3) Personal Consumption Expenditure

The Fed can target the monetary base or the federal funds rate, but not both. 1) If the Fed wants to decrease the monetary base, the federal funds rate must ____. 2) If the Fed wants to raise the federal funds rate, the monetary base must ____.

1) rise 2) decrease

1) The Fed, like most central banks, chooses to use a ___-___ interest rate as its monetary policy instrument. 2) The interest rate the Fed targets is the ___ ___ rate, the ___ rate at which banks can borrow and lend ___ in the federal funds market 3) The federal funds rate can be thought of as the price of the monetary base. The Fed controls the ___ ___

1) short-term 2) federal funds; interest; reserves 3) monetary base

The Fed's Decision-Making Strategy. The Fed can use two alternative decision-making strategies: 1) Instrument Rule: An instrument rule is a decision rule for monetary policy that sets the policy instrument at a level that is based on the current ____ of the economy. 2) Targeting rule: A targeting rule is a decision rule for monetary policy that sets the policy instrument at a level that makes the forecast of the ultimate policy goal ___ to its target. 3) FOMC minutes suggest that the Fed follows a ____ rule that sets the federal funds rate at a level that it forecasts will set the ___ ___ equals to its targeted value

1) state 2) equal 3) targeting; inflation rate

How would the Fed Fight Inflation? The Fed would use ____ monetary policy. Try on our own! Draw the market for bank reserves graph and the AS-AD graph to explain the transmission mechanism when the Fed uses contractionary monetary policy graph #L

contractionary