Lecture 11262014 - 11:12 AM OUTLINE Language re policy See text pg 221 The Fed Monetary Policy continued Federal Funds Rate Yield Curve Zero Lower Bound

Lecture 11262014 - 11:12 AM OUTLINE Language re policy See...

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11/26/2014 11:12 AM 1 OUTLINE November 26, 2014 The Fed & Monetary Policy, continued Federal Funds Rate Yield Curve Zero Lower Bound Phillips Curve Shifts of Phillips Curve PS 4 due Wed/Thurs Dec 3/4 Essay part of final will be distributed Dec 1 & due via bCourses Thurs Dec 11 See text, pg 221 Goal : stable prices Objective : inflation rate = 2% Strategy : increase federal funds rates to 3 % Tactic : sell financial assets So what’s a “monetary policy tool ”? It’s part of the strategy Language re policy Monetary Policy Yield Curve ZLB Phillips Curve Shifts of Phillips Curve Traditional Tool: Federal Funds Rate Fed requires bank reserves 10% of deposits Not enough reserves? Borrow from another bank FFR (federal funds rate): interest rate charged by banks on overnight loans to other banks Demand for federal funds Supply of federal funds Equilibrium Monetary Policy Yield Curve ZLB Phillips Curve Shifts of Phillips Curve Fed influences FFR by changing reserves of banks If Fed increases reserves in banking system If Fed decreases reserves in banking system Action called FOMO: Federal open market operations
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