probably best-known for co-authoring the seminal paper on bundling (still widely cited
today both for its insights and clear explanations).
Dr. Yellen has been on the faculty of
Harvard University and the University of California, Berkeley.
She previously served as
Vice-Chair of the Board of Governors and president of the Federal Reserve Bank of San
From the previous chapter, we know that the Fed controls the
The FOMC meets every six weeks to discuss the state of the
economy and set an interest rate target.
They issue a directive to
the New York Fed that specifies a target interest rate.
The Fed's policy goals are high levels of output and employment,
along with low inflation.
While the process sounds mechanical, FOMC members and Fed
presidents are experts in economics, finance, and related subjects.
There is considerable brain-power in the room at an FOMC meeting.
Many factors are taken into account when setting monetary policy.
call these factors the
They are exogenous.
is an equation that shows how the Fed's interest rate
decision depends on the state of the economy.
Figure 11.6 [26.6] shows how the Fed rule interacts with the
curve slopes downward
Suppose there is an increase in
The Fed rule curve shifts
left (Figure 11.6 [26.6]).
The Fed rule says that an increase
to also rise.
The interest rate rises and equilibrium output falls.
falls. This is the basis for the