33.2 Monetary Policy Transmission

MyEconLab Concept Video

You’ve seen that the Fed’s goal is to keep the inflation rate around 2 percent a year and to keep the output gap close to zero. You’ve also seen how the Fed uses its market power to set the federal funds rate at the level that is designed to achieve these objectives. We’re now going to trace the events that follow a change in the federal funds rate and see how those events lead to the ultimate policy goals. We’ll begin with a quick overview of the transmission process and then look a bit more closely at each step.

Quick Overview

When the Fed lowers the federal funds rate, other short-term interest rates and the exchange rate also fall. The quantity of money and the supply of loanable ...

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