1. Money Policy and the Interest Rate
AP Economics
Mr. Bernstein
Module 31:
Money Policy and the Interest Rate
March 3, 2014

2. AP Economics Mr. 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 Economics Mr. 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 Economics Mr. 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 Economics Mr. Bernstein
Expansionary Monetary Policy & the Economy
Lower i leads to
increase in Investment
AD increases

6. AP Economics Mr. 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 Economics Mr. Bernstein
Contractionary Monetary Policy & the Economy
Higher i leads to
decrease in Investment
AD decreases

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