Pce differs from cpi consumer price index in that it

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PCE differs from CPI (consumer price index) in that it takes into account medial spending, more accurate measure of inflation Government Bonds – sold to curb inflation, the most common tool the Fed uses that directly affects the money supply by buying and selling bonds By selling government bonds, the Fed removes money from the economy, which drives up interest rates When the Fed purchases bonds the money supply is increased When the Fed sells bonds the available money supply is reduced o When the Feds want to decrease the money supply, they sell bonds Nominal Interest Rate – an interest rate that has not been adjusted for inflation over the life of the loan The real interest rate is adjusted based on the expected inflation rate for the life of the loan Neo-Classical school of Economics – states that recessions are short-term events, and that levels of employment will regain stability over time. Neo-classical theorists also believe that prices and wages will automatically adjust to changes in GDP
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Anti-Inflationary policies create a recessionary gap in the short-run, but eventually output returns to optimal levels When the Fed tightens the monetary policy, the dollar will appreciate This causes an increase in demand for money, and a decrease in supply of money, and therefore the price for money will go up Countries with independent banks tend to have less inflation Monetary Policy – is enacted by a central bank in an effort to influence the availability and cost of money Monetary policy – a policy that determine the money supply of an economy Most common, inflation, employment, and interest rate The 1913 Federal Reserve Act – gave the Fed authority to set monetary policy Monetary policy is important in curbing inflation The Federal Reserve System – the main purpose is to regulate the supply of money and maintain price stability Controls the money supply through monetary policy and fiscal policy The Federal Open Market Committee (FOMC) – is responsible for monetary policy decisions in the Federal Reserve Is a branch of the Federal Reserve System that is responsible for buying and selling government bonds Has 12 members which include the 7 Federal Reserve governors Inflation Protected Bonds – bonds that pay a fixed real rate plus a rate equal to the actual rate of inflation that year Bonds first offered by the U.S. Treasury in an effort to protect investors Compounding Interest – interest paid is added to the principal for future calculations of interest payments Simple Interest – interest is not added to the principal – there is no compounding Only paid on the original deposit Expansionary Gap – occurs when demand exceeds potential output (Y*) Organizations will raise prices sharply, causing high rates of inflation Inflation Hawks – members of the central bank that are committed to low inflation rates at any cost Act on their belief that lower inflation rates lead to higher economic growth rates
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