Monetary policy
Updated: 1/11/2021
Monetary policy

Storyboard Text

  • That sounds awesome! Free money just for being patient
  • Yes, exactly! And don't forget you can always sell the bond if you need the money or the central bank could buy it from you for a higher price than what you bought it for
  • Wait so how does this bank know how much money they need or don't need? 
  • Good question! This man named John Taylor invented a formula just for that question! He was concerned about the monetary policy taking into account inflation and the business cycle.
  • How does that even work?
  • Well, his rule sets the federal funds rate. This is the interest rate banks charge each other for loans from the central bank to meet reserve requirements. It takes into account inflation and the aggregate demand gap that's causing the problem.
  • Ok you lost me there but I got everything else! Thanks Mrs. Smith
  • So with the Taylor rule we can set how effective the monetary policy should be. The rule is: Fed Funds= 1+(1.5x inflation rate)+(0.5x output gap)
  • Its not like I'm going to have to learn this in high school right?
  • No problem!
  • ...If I walk away he can't ask me anymore questions