Module Monetary Policy and the Interest Rate KRUGMAN'S MACROECONOMICS for AP* 31 Margaret Ray and David Anderson What you will learn in this Module : 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 Monetary Policy and the Interest Rate: Targeting the Fed Funds Rate Expansionary Monetary Policy Expansionary Monetary Policy The Economy The Money Market Contractionary Monetary Policy Contractionary Monetary Policy The Economy The Money Market Monetary Policy in Practice Fed policy and the output gap Taylor Rule Fed Funds =... 1+(1.5 X %)+(0.5 X Output Gap) Stanford Economist, John Taylor Inflation Targeting Inflation Targeting The Fed and Inflation Inflation Targeting Inflation Targeting v. Taylor Rule Inflation Targeting v. Fed discretion