KEY CONCEPTS

Match each of the terms on the left with its definition on the right. Click on the term first and then click on the matching definition. As you match them correctly they will move to the bottom of the activity.

Question

expansionary monetary policy
contractionary monetary policy
equation of exchange
money illusion
liquidity trap
easy money, quantitative easing, or accommodative monetary policy
tight money or restrictive monetary policy
monetary rule
inflation targeting
Taylor rule
Fed actions designed to increase excess reserves and the money supply to stimulate the economy (increase income and employment). See also expansionary monetary policy.
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 real output level.
Fed actions designed to decrease the money supply and raise interest rates to shrink income and employment, usually to fight inflation.
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 long-run path for the economy that keeps inflation in check.
The central bank sets a target on the inflation rate (usually around 2% per year) and adjusts monetary policy to keep inflation near that target.
When interest rates are so low, people hold on to money rather than invest in bonds due to their expectations of a declining economy or an unforeseen event such as war.
A misperception of wealth caused by a focus on increases in nominal income but not increases in prices.
Fed actions designed to increase the money supply and lower interest rates to stimulate the economy (expand income and employment).
A rule for the federal funds target that suggests the target is equal to 2% + Current Inflation Rate + 1/2(Inflation Gap) + 1/2(Output Gap).
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.
[Leave] [Close]