ECON 201 Lecture Notes - Lecture 27: Core Inflation, Business Cycle, Output Gap

• School: University of Maryland
• Department: Economics
• Course: ECON 201
• Professor: John Neri

Document Summary

Objectives of monetary policy and the framework for setting and achieving them. How the reserve makes a interest rate decision and achieves its interest rate target. The transmission channels through the reserve influences real gdp, jobs, and inflation. Federal reserve act of 1913 and amendments. Fed shall promote the goals of maximum employment, stable prices, and moderate long term interest rates. Interest rates are a means of achieving those goals. Fed looks at two measures of inflation: cpi and pce deflator. Fed"s preferred method is the pce excluding food and fuel. This is known as the core pce deflator. Rate of increase of the core pce deflator is the core inflation rate. Fed believes the core inflation rate is less volatile than the core pce or cpi. Pce holds price constant and lets quantity change. Pce has broader coverage by including items not paid for directly. The fed"s stated objective is 2% inflation.