Podcast
Questions and Answers
How does a decrease in the money supply affect inflation, according to the session?
How does a decrease in the money supply affect inflation, according to the session?
What role does the velocity of money (V) play in the MV = PY equation?
What role does the velocity of money (V) play in the MV = PY equation?
What is the purpose of quantitative easing (QE) as a monetary policy tool?
What is the purpose of quantitative easing (QE) as a monetary policy tool?
How does a steepening yield curve typically relate to monetary policy?
How does a steepening yield curve typically relate to monetary policy?
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What are the main components of the FED model?
What are the main components of the FED model?
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What could potentially lead to a wage-price spiral in the economy?
What could potentially lead to a wage-price spiral in the economy?
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What is the primary mandate of the Federal Reserve (Fed)?
What is the primary mandate of the Federal Reserve (Fed)?
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What does the Taylor rule primarily use to determine the Fed funds target rate?
What does the Taylor rule primarily use to determine the Fed funds target rate?
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What is R-star in monetary policy?
What is R-star in monetary policy?
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How does a decrease in the central bank's key interest rate affect bond investments?
How does a decrease in the central bank's key interest rate affect bond investments?
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What does an expansive monetary policy imply?
What does an expansive monetary policy imply?
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Which of the following is a tool used in unconventional monetary policy?
Which of the following is a tool used in unconventional monetary policy?
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Study Notes
Federal Reserve and Monetary Policy
- The primary mandate of the Federal Reserve (Fed) is to maintain price stability and maximize sustainable employment.
- The Taylor rule uses the inflation rate and output gap to determine the Fed funds target rate.
Monetary Policy Tools
- R-star is the equilibrium real rate of interest consistent with an economy at full potential.
- A decrease in the central bank's key interest rate decreases the yield on longer-dated maturities.
- An expansive monetary policy implies an increase in the money supply.
- Quantitative easing (QE) is a tool used in unconventional monetary policy.
FED Model
- The primary purpose of the FED model is to compare bond yields with earnings yields of S&P500.
- The main components of the FED model are the 10-year Treasury yield and earnings yield of S&P500.
Inflation
- A source of higher inflation mentioned in the session is supply-side shocks.
- During the COVID-19 pandemic, Phase I of higher inflation occurred due to supply-side shocks.
- A potential consequence of wage increases during inflationary periods is a decrease in purchasing power.
- A decrease in the money supply decreases inflation.
- Wage increases exceeding inflation could potentially lead to a wage-price spiral in the economy.
Yield Curve and Monetary Policy
- A steepening yield curve typically relates to an expansionary monetary policy.
- The Federal Reserve primarily influences long-term interest rates through forward guidance and quantitative easing.
- The purpose of quantitative easing (QE) as a monetary policy tool is to reduce long-term interest rates.
- A flat or inverted yield curve typically discourages banks from lending.
Business Cycle
- The expansion phase is typically characterized by high levels of consumer confidence and increased spending.
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Description
Test your knowledge on the primary mandate of the Federal Reserve, the Taylor rule, R-star, and other key concepts in monetary policy.
