CHAPTER15Monetary PolicyChapterOutlineandLearningObjectives15.1WhatisMonetaryPolicy?15.2TheMoneyMarketandtheFed'sChoice of MonetaryPolicy Targets15.3MonetaryPolicyandEconomicActivity15.4MonetaryPolicyintheDynamicAggregateDemandandAggregateKIJovnanianSupplyModel15.5ACloserLookattheFed'sSettingSOLDofMonetary Policy Targets15.6FedPoliciesduringthe2007-2009Recession
1 Chapter Outline and Learning Objectives 15.1 What is Monetary Policy? 15.2 The Money Market and the Fed’s Choice of Monetary Policy Targets 15.3 Monetary Policy and Economic Activity 15.4 Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model 15.5 A Closer Look at the Fed’s Setting of Monetary Policy Targets 15.6 Fed Policies during the 2007-2009 Recession CHAPTER 15 CHAPTER Monetary Policy
WhatCantheFederal ReserveDo?Last chapter we introduced the monetary policy tools that the FederalReserve can use to influence the money supply.: Now we will address how and why the Fed takes the actions that itdoes.Wewill also pay special attention to the unique circumstancessurrounding the recession of 2007-2009, and the Fed's responsetothosecircumstances.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 2 What Can the Federal Reserve Do? Last chapter we introduced the monetary policy tools that the Federal Reserve can use to influence the money supply. • Now we will address how and why the Fed takes the actions that it does. • We will also pay special attention to the unique circumstances surrounding the recession of 2007-2009, and the Fed’s response to those circumstances
WhatisMonetaryPolicy?15.1LEARNINGOBJECTIVEDefine monetarypolicyand describetheFederal Reserve'smonetary policygoals.@2015PearsonEducation,lnc3
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 3 What is Monetary Policy? 15.1 Define monetary policy and describe the Federal Reserve’s monetary policy goals
WhatlstheRoleof theFederal Reserve?WhentheFederalReserve wascreatedinthe1913,itsmainresponsibility was to prevent bank runs..After the Great Depression of the 1930s, Congress gave the Fedbroader responsibilities:to act“so as to promote effectively thegoals of maximum employment, stable prices, and moderate longterm interest rates."Since World War ll, the Fed has carried out an active monetarypolicy.Monetary policy: The actions the Federal Reserve takes to managethe money supply and interest rates to pursue macroeconomic policygoals.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 4 What Is the Role of the Federal Reserve? When the Federal Reserve was created in the 1913, its main responsibility was to prevent bank runs. • After the Great Depression of the 1930s, Congress gave the Fed broader responsibilities: to act “so as to promote effectively the goals of maximum employment, stable prices, and moderate longterm interest rates.” Since World War II, the Fed has carried out an active monetary policy. Monetary policy: The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals
TheGoalsof MonetaryPolicyThe Fed pursues four main monetary policy goals:1. Price stability2.High employment3.Stability of financial markets and institutions4. Economic growthWewill considereachgoal inturn@2015PearsonEducafion,lnc
© 2015 Pearson Education, Inc. 5 The Goals of Monetary Policy The Fed pursues four main monetary policy goals: 1. Price stability 2. High employment 3. Stability of financial markets and institutions 4. Economic growth We will consider each goal in turn
Fed Goal#1:PriceStabilityThe figure shows CPlinflation in the United StatesnualinflationrateSince rising prices erode the16%value of money as a medium14of exchange and a store of1210value, policymakers in most8countriespursueprice6stability as a primary goal.42After the high inflation of theo1970s, then Fed chairman19671972197719821987199219972002200720129571962195Paul Volcker made fighting-4inflation his top policy goal.To this day, price stabilityremains a key policy goal ofFigure15.1The inflation rate, January1952-June2013the Fed.@2015PearsonEducation.lnc
© 2015 Pearson Education, Inc. 6 Fed Goal #1: Price Stability The figure shows CPI inflation in the United States. Since rising prices erode the value of money as a medium of exchange and a store of value, policymakers in most countries pursue price stability as a primary goal. After the high inflation of the 1970s, then Fed chairman Paul Volcker made fighting inflation his top policy goal. To this day, price stability remains a key policy goal of the Fed. The inflation rate, January 1952-June 2013 Figure 15.1
FedGoal#2:HighEmploymentAt the end of World War Il, Congress passed the Employment Act of1946, which stated that it was the:“"responsibility of the Federal government...tofoster and promote...conditions under which there will be afforded useful employment, folthose able, willing, and seeking to work, and to promote maximumemployment, production, and purchasing power."Thus price stability and high employment are often referred to as thedualmandateoftheFed@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 7 Fed Goal #2: High Employment At the end of World War II, Congress passed the Employment Act of 1946, which stated that it was the: “responsibility of the Federal government. to foster and promote. conditions under which there will be afforded useful employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.” Thus price stability and high employment are often referred to as the dual mandate of the Fed
Fed Goal #3:Stability of Financial Markets and InstitutionsStable and efficient financial markets are essential to a growingeconomy.The Fed makes funds available to banks in times of crisis, ensuringconfidenceinthosebanks.In 2008,theFedtemporarily made these discountloans availableto investment banks also, in order to ease their liquidity problems@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 8 Fed Goal #3: Stability of Financial Markets and Institutions Stable and efficient financial markets are essential to a growing economy. The Fed makes funds available to banks in times of crisis, ensuring confidence in those banks. • In 2008, the Fed temporarily made these discount loans available to investment banks also, in order to ease their liquidity problems
FedGoal#4:EconomicGrowthStable economic growth encourages long-run investment, which isitselfnecessaryforgrowth.. It is not clear to what extent the Fed can really encourage long-runinvestment,beyond meeting the previous three goals.Congressand the President may be in a better position to address this goal.@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 9 Fed Goal #4: Economic Growth Stable economic growth encourages long-run investment, which is itself necessary for growth. • It is not clear to what extent the Fed can really encourage long-run investment, beyond meeting the previous three goals. Congress and the President may be in a better position to address this goal
TheMoneyMarketand theFed'sChoiceof MonetaryPolicyTargets15.2LEARNINGOBJECTIVEDescribetheFederal Reserve's monetarypolicytargetsand explainhowexpansionaryand contractionarymonetarypoliciesaffecttheinterestrate10@2015PearsonEducafion,lnc
LEARNING OBJECTIVE © 2015 Pearson Education, Inc. 10 The Money Market and the Fed’s Choice of Monetary Policy Targets 15.2 Describe the Federal Reserve’s monetary policy targets and explain how expansionary and contractionary monetary policies affect the interest rate