1. AP Economics Mr. Bernstein Module 31: Money Policy and the Interest Rate March 3, 2015

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 2

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? 3

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? 4

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

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? 6

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

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