Explain the given statement and identify why the primary goal of Fed is price stability.
Explanation of Solution
The
Monetary policy: The monetary policies are the policies taken by the central bank to chase its objectives such as price stability and maximum employment.
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Chapter 14 Solutions
EBK MACROECONOMICS
- Now go to FRED and search for PCEPI. This is the price index that receives the most attention from the Federal Reserve in terms of fulfilling the nominal part of their dual mandate. Calculate the most recent rate of inflation (12 months) using PCEPI to the nearest two decimal places and compare to the Fed's implicit target of inflation = 2%. Is inflation too high, too low, or just right (circle your answer)? TPCE Too high Too low Just rightarrow_forwardExplain the FED role to cope with rising inflation.arrow_forwardDiscuss the costs of inflation (give two negatives) and the costs to the economy if the FED uses contractionary Monetary policy to fight it (give at least one negative).arrow_forward
- Why does having a dual mandate complicate policy making at a central bank like the FED? Why do some people say that the FED also has a third mandate? If the FED can only directly control nominal interest rates, how does the FED influence real interest rates that determine the actual stance of monetary policy? What circumstances or issues created the need for modern monetary policy?arrow_forwardActions by the Fed to fight rising rates of inflation likely will initially: (a) reduce long-term interest rates; (b) expand the size of the Fed’s balance sheet; (c) cause the Treasury Department to issue fewer repurchase agreements; (d) increase short-term interest ratesarrow_forwardThe Bank of Sweden inflation target is 2 % - which is a very common central bank goal. Why is it not zero percent?arrow_forward
- Assume the economy is suffering from massive inflation and you are the Chairperson of the FED. What type of monetary policy would you employ and describe what changes are made to the “three tools” of monetary policy. Describe the subsequent impact on the money supply, interest rates, aggregate spending, and real GDP.arrow_forwardAn economy is currently experiencing inflation that exceeds the target rate set by the central bank. Explain the process in full detail by which the central bank can bring the inflation rate down.arrow_forwardWhich of the following statements best describes the Federal Reserve's dual mandate. A stable financial system and stable inflation at 2%. B Maximum employment and 0% inflation C Maximum employment and long-run inflation at 2% D Full employment, 4% unemployment rate, and low, stable inflationarrow_forward
- The Federal Reserve uses an inflation target of 2-3%; most economists agree that the US natural rate of unemployment is around 4.5%. Imagine that you are a policy analyst observing the government and the Federal Reserve. You determine that inflation is 1% (very low) and unemployment is hovering around 6.5% (quite high.) The Federal Reserve responds by cutting interest rates and beginning to buy government bonds in open-market operations. The government takes the position that the only way out of a recession is to decrease government spending and passes a budget with very little spending (this is called "taking austerity measures"). What effects would the Fed's actions have, if taken alone? What effects would the government's actions have, if taken alone? What do you predict will occur when both actions are taken? Who do you think is making the right suggestion?arrow_forwardThe long-run effects of monetary policy The following graphs show the state of an economy that is currently in long-run equilibrium. The first graph shows the aggregate demand (AD) and long-run aggregate supply (LRAS) curves. The second shows the long-run and short-run Phillips curves (LRPC and SRPC). 1. Suppose the central bank of the economy increases the money supply. Show the long-run effects of this policy on both of the graphs by shifting the appropriate curves (Please use the images attached) 2. Which of the following statements are true based on these graphs? Check all that apply. a. The natural rate of unemployment is 6%. b.The natural level of output is 6%. c.It is impossible to determine the natural rate of unemployment from these graphs alone.arrow_forwardAre you concerned about the inflation come back due to such easy monetary policy with zero interest rate for long time? if so, how fast is the Fed supposed to tighten its monetary policy as an normalizing strategy?arrow_forward
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