(BQ) Part 2 book "Macroeconomics" has contents: Monetary policy and the phillips curve, the government and the macroeconomy, international trade, exchange rates and international finance, parting thoughts, the great recession and the short run model,.and other contents. | 12 MONETARY POLICY AND THE PHILLIPS CURVE In this chapter, we learn how the central bank effectively sets the real interest rate in the short run, and how this rate shows up as the MP curve in our short-run model. that the Phillips curve describes how firms set their prices over time, pinning down the inflation rate. how the IS curve, the MP curve, and the Phillips curve make up our short-run model. how to analyze the evolution of the macroeconomy—output, inflation, and interest rates—in response to changes in policy or economic shocks. 305 306 | Chapter 12 Monetary Policy and the Phillips Curve “ Our mission, as set forth by the Congress, is a critical one: to preserve price stability, to foster maximum sustainable growth in output and employment, and to promote a stable and efficient financial system that serves all Americans well and fairly. — BEN S. BERNANKE Introduction How does a central bank go about achieving the lofty goals summarized by Chairman Bernanke in the quotation above? This question becomes even more puzzling when we realize that the main policy tool used by the Federal Reserve is a humble interest rate called the federal funds rate. The fed funds rate, as it is often known, is the interest rate paid from one bank to another for overnight loans. How does this very short-term nominal interest rate, used only between banks, have the power to shake financial markets, alter medium-term investment plans, and change GDP in the largest economy in the world? Recall that the IS curve describes how the real interest rate determines output. So far, we have acted as if policymakers can pick the level of the real interest rate. This chapter introduces the “MP curve,” where MP stands for “monetary policy.” This curve describes how the central bank sets the nominal interest rate and then exploits the fact that real and nominal interest rates move closely together in the short run. We then revisit the Phillips curve (first introduced in Chapter 9), .
