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.

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.

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

Fed actions designed to increase the money supply and lower interest rates 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. See also contractionary 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.

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).

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.

Fed actions designed to decrease the money supply and raise interest rates to shrink income and employment, usually to fight inflation.

A misperception of wealth caused by a focus on increases in nominal income but not increases in prices.