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Mastering Monetary Policy: Impact on Economy & Interest Rates

Learn how the Federal Reserve implements monetary policy to influence the interest rate and stabilize the economy. Discover the effects of expansionary and contractionary monetary policies on Real GDP, Investment, and Aggregate Demand.

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Mastering Monetary Policy: Impact on Economy & Interest Rates

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  1. AP Economics Mr. Bernstein Module 31: Money Policy and the Interest Rate March 12, 2014

  2. AP EconomicsMr. Bernstein Monetary Policy and the Interest Rate • Objectives - Understand each of the following: • 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

  3. AP EconomicsMr. Bernstein Monetary Policy and the Interest Rate: Targeting the Fed Funds Rate • How Do Fed Open Markets Operations increase M2? • (Buying or Selling? What instruments?) • What is the effect of the operation on short-term interest rates in the Money Market?

  4. AP EconomicsMr. Bernstein Expansionary Monetary Policy • Fed buys securities • MS increases – money is dropped into the system • Rates decrease • How does this link to Real GDP?

  5. AP EconomicsMr. Bernstein Expansionary Monetary Policy & the Economy • Lower i leads to increase in Investment • AD increases

  6. AP EconomicsMr. Bernstein Contractionary Monetary Policy • Fed sells securities • MS decreases – pulls excess reserves out of system • Rates increase • How does this link to Real GDP?

  7. AP EconomicsMr. Bernstein Contractionary Monetary Policy & the Economy • Higher i leads to decrease in Investment • AD decreases

  8. AP EconomicsMr. Bernstein Monetary Policy in Practice • The Fed is balancing multiple objectives which may at times conflict • Price Stability • Full Employment

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