Probably best known for co authoring the seminal

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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 Francisco. 1. From the previous chapter, we know that the Fed controls the interest rate. 2. 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. 3. The Fed's policy goals are high levels of output and employment, along with low inflation. 4. 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. We call these factors the Z factors. They are exogenous. 5. 5. The Fed rule is an equation that shows how the Fed's interest rate decision depends on the state of the economy. 6. 6. Figure 11.6 [26.6] shows how the Fed rule interacts with the IS curve: C. Deriving the AD Curve 1. The AD curve slopes downward a. Suppose there is an increase in P . The Fed rule curve shifts left (Figure 11.6 [26.6]). The Fed rule says that an increase in P must cause r to also rise. b. The interest rate rises and equilibrium output falls. Thus, as P rises equilibrium Y falls. This is the basis for the downward-sloping AD curve.
c. An increase in G shifts IS and AD to the right. An increase in Z shifts the Fed rule curve and the AD curve to the left. (Remember, this is how Z was defined.) 2. The Aggregate Demand Curve: A Warning a. The AD curve is not a market demand curve and is not the sum of all market demand curves in an economy. b. Aggregate demand is a function of the overall price level, not the price of any single product. An increase in the price level causes the demand for money to rise, increasing the interest rate and decreasing aggregate expenditure. 3. Figure 11.7 [26.7] summarizes the AD curve: Figure 11.7 [26.7] Economics in Practice: How Does the Fed Look at Inflation?, page 223 [543]
4. Figure 11.8 [26.8] summarizes the AD-AS model: Figure 11.8 [26.8] III. The Final Equilibrium A. At every point on the AS curve, firms make price and output decisions that maximize profits. B. At every point on the AD curve there is equilibrium in both the goods and

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