Question description

 

1. Suppose the Fed were required to conduct monetary policy so as to hold

the unemployment rate below 4%, the goal specified in the

Humphrey–Hawkins Act. What implications would this have for the

economy?

2. The statutes of the recently established European Central Bank (ECB)

state that its primary objective is to maintain price stability. How does

this charter differ from that of the Fed? What significance does it have

for monetary policy?

3. Do you think the Fed should be given a clearer legislative mandate

concerning macroeconomic goals? If so, what should it be?

4. Referring to the Case in Point on targeting, what difference does it make

whether the target is the inflation rate of the past year or the expected

inflation rate over the next year?

5. In a speech in January 1995,Speech by Alan Greenspan before the

Board of Directors of the National Association of Home Builders,

January 28, 1995. Federal Reserve Chairman Alan Greenspan used

a transportation metaphor to describe some of the difficulties of

implementing monetary policy. He referred to the criticism

levied against the Fed for shifting in 1994 to an anti-inflation,

contractionary policy when the inflation rate was still quite low:

“To successfully navigate a bend in the river, the barge must

begin the turn well before the bend is reached. Even so, currents

are always changing and even an experienced crew cannot

foresee all the events that might occur as the river is being

navigated. A year ago, the Fed began its turn (a shift toward an

expansionary monetary policy), and it was successful.”

Mr. Greenspan was referring, of course, to the problem of lags.

What kind of lag do you think he had in mind? What do you

suppose the reference to changing currents means?

6. In a speech in August 1999,Alan Greenspan, “New challenges for

monetary policy,” speech delivered before a symposium

sponsored by the Federal Reserve Bank of Kansas City in Jackson

Hole, Wyoming, on August 27, 1999. Mr. Greenspan was famous

for his convoluted speech, which listeners often found difficult to

understand. CBS correspondent Andrea Mitchell, to whom Mr.

Greenspan is married, once joked that he had proposed to her

three times and that she had not understood what he was talking

about on his first two efforts. Mr. Greenspan said,

We no longer have the luxury to look primarily to the flow of

goods and services, as conventionally estimated, when

evaluating the macroeconomic environment in which monetary

policy must function. There are important—but extremely

difficult—questions surrounding the behavior of asset prices and

the implications of this behavior for the decisions of households

and businesses.

The asset price that Mr. Greenspan was referring to was the U.S.

stock market, which had been rising sharply in the weeks and

months preceding this speech. Inflation and unemployment were

both low at that time. What issues concerning the conduct of

monetary policy was Mr. Greenspan raising?

7. Suppose we observed an economy in which changes in the money supply

produce no changes whatever in nominal GDP. What could we conclude

about velocity?

8. Suppose price levels were falling 10% per day. How would this affect the

demand for money? How would it affect velocity? What can you

conclude about the role of velocity during periods of rapid price change?

9. Suppose investment increases and the money supply does not change.

Use the model of aggregate demand and aggregate supply to predict the

impact of such an increase on nominal GDP. Now what happens in terms

of the variables in the equation of exchange?