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Learning Basic Macroeconomics by Hal W. Snarr

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CHAPTER 6

Monetary Policy

Monetary policy is the process by which a nation’s central bank manipulates the supply of money to achieve full employment, maintain a low rate of inflation, or both. In the United States, the central bank is the Fed. Although the Chicago school advocates for central banks to pursue low, steady rates of money growth, the Fed historically has targeted interest rates to fulfill its dual mandate of full employment and low stable inflation.1 Presently, the Fed’s target for unemployment is 5 to 6 percent, and its inflation target is 2 percent.2 For most of its history, the Fed has used the discount rate (id), the reserve requirement ratio (rrr), and its primary policy lever, open market operations, to achieve these objectives. ...

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