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Monetary Policy & The Fed
AP Macroeconomics · Unit 4 Financial Sector
Learning Objectives
Expansionary: Fed buys bonds → ↑ money supply → ↓ interest rate → ↑ investment → ↑ AD → ↑ GDP (fight recession).
Contractionary: Fed sells bonds → ↓ money supply → ↑ interest rate → ↓ investment → ↓ AD → ↓ GDP (fight inflation).
3 Fed Tools: Open Market Operations (primary), Federal Funds Rate (target), Reserve Requirements (rarely used).
Tags
MonetaryFedInterest RateMoney Supply
Fed Policy Action
CAUSAL CHAIN
Fed Stance → No Change
Money Supply → Unchanged
Interest Rate → Unchanged
Investment → Unchanged
AD → Unchanged
GDP → Unchanged
The Fed's Dual Mandate: Maximum employment AND stable prices (2% inflation target). These goals often conflict — expansionary policy helps employment but risks inflation, and vice versa.