Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation. See also contractionary monetary policy

The central bank sets a target on the inflation rate (usually around 2% per year) and adjusts monetary policy to keep inflation in that range

Keeps the growth of money stocks such as M1 or M2 on a steady path, following the equation of exchange (or quantity theory), to set a longrun path for the economy that keeps inflation in check

Fed actions designed to increase excess reserves and the money supply to stimulate the economy (expand income and employment)

Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation

The heart of classical monetary theory uses the equation M × V = P × Q, where M is the supply of money, V is the velocity of money (the average number of times per year a dollar is spent on goods and services, or the number of times it turns over in a year), P is the price level, and Q is the economy’s output level

When interest rates are so low that people believe rates can only rise, they hold on to money rather than investing in bonds and suffering the expected capital loss

Fed actions designed to increase excess reserves and the money supply to stimulate the economy (expand income and employment). See also expansionary monetary policy

A rule for the federal funds target that suggests that the target is equal to 2% + Current Inflation Rate + 1/2(Inflation Gap) + 1/2(Output Gap). Alternatively, it is equal to 2% plus the current inflation rate plus 1/2 times the difference between the current inflation rate and the Fed’s inflation target rate plus 1/2 times the output gap (current GDP minus potential GDP)