Ch15 - CHAPTER 1 5 Monetary Policy After studying this...

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Monetary Policy CHAPTER 15
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After studying this chapter you will be able to Describe the objectives of U.S. monetary policy and the framework for setting and achieving them Explain how the Federal Reserve makes its interest rate decision and achieves its interest rate target Explain the transmission channels through which the Federal Reserve influences the inflation rate Explain and compare alternative monetary policy strategies
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What Can Monetary Policy Do? On eight pre-set dates a year, the Federal Reserve announces whether the interest rate will rise, fall, or remain constant until the next decision date. How does the Fed make its interest rate decision? What does the Fed do to keep interest rates where it wants them? Does the Fed’s interest rate changes influence the economy in the way the Fed wants? Can the Fed speed up economic growth by lowering interest rates and keep inflation in check by raising them?
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Monetary Policy Objectives and Framework A nation’s monetary policy objectives and the framework for setting and achieving that objective stems from the relationship between the central bank and the government.
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Monetary Policy Objectives and Framework Monetary Policy Objectives The objectives of monetary policy stems from the mandate of the Board of Governors of the federal Reserve System as set out in the Federal Reserve Act of 1913 and its amendments. The law states: The Fed and the FOMC shall maintain long-term 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.
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Monetary Policy Objectives and Framework Goals and Means Fed’s monetary policy objectives has two distinct parts: 1. A statement of the goals or ultimate objectives 2. A prescription of the means by which the Fed should pursue its goals
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Monetary Policy Objectives and Framework Goals of Monetary Policy Maximum employment, stable prices, and moderate long-term interest rates In the long run, these goals are in harmony and reinforce each other, but in the short run, they might be in conflict. Key goal is price stability. Price stability is the source of maximum employment and moderate long-term interest rates.
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Monetary Policy Objectives and Framework Means of Achieving the Goals By keeping the growth rate of the quantity of money in line with the growth rate of potential GDP, the Fed is expected to be able to maintain full employment and keep the price level stable. How does the Fed operate to achieve its goals?
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Monetary Policy Objectives and Framework Operational “Stables Prices” Goal The Fed also pays close attention to the CPI excluding fuel and food—the core CPI. The rate if increase in the core CPI is the
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Ch15 - CHAPTER 1 5 Monetary Policy After studying this...

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