Part 2. Matching: Match the Key terms in Column "A" with the definitions in Column "B" by writing the block letter of your choice from Column "B n the space provided under "A" and match the definitions in column "B" with the meanings or formulas or examples or facts in column "C" by writing the lower letter case of your choice in the space provided under column "B". Column "A" Column "B" Column "C" a. The percentage difference between the level of potential 1. Transmission A. The policy by which the Fed decreases the money supply. output expected at full employment & the actual GDP produced by the economy, also known as "Slack" in the Mechanism B. Targeting that requires the Fed to keep the inflation rate near economy = Low capital utilization and unemployed resources. b. Also known as: "Quantitative tightening" 2. Demand for a predetermined level. The road map that monetary policy follow through the use Money ("Real _C. Persons who argue that monetary and fiscal policies should be of its tools (OMO, DR, r), instruments (Reserves or M2) and targets (the federal funds rate or other interest rates, the deliberately used to smooth out the business cycle. Money Balances") federal funds rate is the interest rate the Fed targets since D. The policy by which the Fed increases the money supply. about 1965) to achieve its goals (increasing real GDP or reducing unemployment or price & financial market stability) 3. Liquidity Trap E. Persons who argue against the deliberate use of discretionary by affecting the total demand & supply of goods & services in the market). 4. Expansionary fiscal and monetary policies. They believe in a permanent, d. When the FED fails to achieve its objective of lowering Monetary Policy interest rate using its usual tools and instruments of monetary stable, rule-oriented monetary and fiscal framework. policy, in this case, its policy become ineffective because interest rate can't get any lower than it is now in the money 5. Contractionary _F. The horizontal portion of the demand curve for money. market Monetary Policy _G. [(Real GDP - Potential GDP) / Potential GDP] X 100. e. Those who believe the Fed should set rules in advance and declare them to the public and follow these rules as _H. The (usually frequent) use of monetary and fiscal policies to needed. 6. Activists counteract even small undesirable movements in economic f. A monetary policy rule to keep inflation within acceptable 7. Fine-tuning activity. levels. I. The inverse relationship between the quantity demanded of g. As interest rate increases (decreases), the demand for 8. Non-activists money for transaction, precautionary and speculative money balances and the price of holding money balances. purposes decrease (increase). 9. Inflation J. The routes, or channels, traveled by the ripple effects that the h. Also known as: "Quantitative easing" money market creates and that affect the goods and services i. Those who believe the need to formulate and use Targeting market represented by the aggregate demand and aggregate monetary policy actively at times of economic downturns. supply curves in the AD-AS framework). j The choice of making even the slightest adjustment of 10. GDP Gap monetary policy to bring desired results in the financial market and the economy