Lesson+14+Tools+of+the+Fed

Lesson+14+Tools+of+the+Fed - Lesson 14-Monetary Policy and...

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Unformatted text preview: Lesson 14--Monetary Policy and The Economy/Tools of the Fed FRSPF—chapter 2 M&B -- chapter 16 Goals of Monetary Policy—The Federal Reserve Act • Maximum Sustainable Growth & Employment • Price Stability • Moderate Long Term Interest Rates (these days presumed to be a function of stable prices) What Is Maximum Sustainable Growth? What Do We Mean by Maximum Sustainable Employment? History of Unemployment Rate vs Common Notions of NAIRU Civilia n Un e m p lo ym e n t Ra te vs Co m m o n No tio n s o f Up p e r a n d L o w e r Bo u n d s o n NAIRU 2.5 0 3.5 0 4.5 0 5.5 0 6.5 0 7.5 0 8.5 0 9.5 0 1 0.50 1 1.50 What Do We Mean By Price Stability? Current Fed Debate: Inflation Rate or Price Level Target Basic Tools of the Fed • Open Market Operations • Reserve Requirements • Discount Window Loans New Tools in the Toolbox— Crisis or Zero-Bound • Interest on Reserves • Large Scale Asset Purchases or what some people are calling “Quantitative Easing” • Purchases of Agency and Agency Related MBS • Opening the Discount Window to Nonbanks using Section 13 (3) of the Federal Reserve Act Open Market Operations are aimed at manipulating Fed’s Balance Sheet to affect the level of Bank Reserve Balances Federal Reserve (before Crisis related tools added)...
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Lesson+14+Tools+of+the+Fed - Lesson 14-Monetary Policy and...

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