Download Monetary Policy and the INterest Rate

Module 31
Monetary
Policy and
the Interest Rate
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How the Federal Reserve implements
monetary policy, moving the interest rate
to affect aggregate output
• Why monetary policy is the main tool for
stabilizing the economy
Monetary Policy and the Interest
Rate: Targeting the Fed Funds Rate
Feds increase the $$$ supply.
Buy Treasury Bills.
Short-term Interest Rates fall.
Feds decrease the $$$ supply.
Sell Treasury Bills.
Short-term Interest Rates rise.
Expansionary Monetary Policy
1.
2.
3.
4.
5.
6.
7.
8.
The
Money
Market
Chain of Events
Fed sees economy in recessionary gap.
Fed increases $$$ supply.
Interest rate falls.
I and C increase.
Ad shifts right.
Real GDP increases.
U rate decrease.
Aggregate P level rises
The Economy
Contractionary Monetary Policy
The
Money
Market
1.
2.
3.
4.
5.
6.
7.
8.
Chain of Events
Fed sees economy inflationary gap.
Fed decreases $$$ supply.
Interest rate rises.
I and C decrease.
Ad shifts left.
Real GDP decreases.
U rate increase.
Aggregate P level falls.
The Economy