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12 Aug 2019

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?

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Keith Leannon
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13 Aug 2019

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Related questions

The Current State of the European Economy: By now, you are relatively familiar with recent economic events in the United States. But what about Europe? Write two paragraphs about the state of the economy in the Euro area over the past several years. What has happened to inflation, real GDP growth, and unemployment? What about key policy interest rate set by the European Central Bank (ECB)? [Hint: The ECB sets several key interest rates, including a “deposit rate” (the interest rate the ECB pays on deposits from banks) and a “lending rate” (the interest rate it charges for overnight loans). All are useful and interesting. To keep us all on the same page, let’s look at the lending rate.] An extremely helpful resource for this exercise is the ECB’s Statistical Data Warehouse: http://sde.ecb.europa.eu. (You may find tit convenient to make a brief table of this data or even copy some of the ECB’s Graphs.)

The U.S. Federal Reserve is the central bank of the United States. It has many roles in the economy, but one of its key roles is conducting monetary policy.

  1. What is monetary policy?
  2. Suppose the Fed wants to close an inflationary gap. How could it use each of the three tools of monetary policy to close the gap? 
  3. Using the monetary policy tool the Fed employs most often, the Fed closes an inflationary gap. Describe the steps the economy goes through to move to the new equilibrium output and price level. Use graphs with your answer and be sure to label everything completely.

 

1. Impact of Monetary Policy How does the Fed’s monetary policy affect economic conditions?

2. Trade-offs of Monetary Policy Describe the economic trade-off faced by the Fed in achieving its economic goals.

3. Choice of Monetary Policy When does the Fed use a loose-money policy, and when does it use a tight- money policy? What is a criticism of a loose-money policy? What is the risk of using a monetary policy that is too tight?

4. Active Monetary Policy Describe an active monetary policy.

5. Passive Monetary Policy Describe a passive monetary policy.

6. Fed Control Why may the Fed have difficulty controlling the economy in the manner desired? Be specific.

7. Lagged Effects of Monetary Policy

Compare the recognition lag and the implementation lag.

8. Fed’s Control of Inflation Assume that the Fed’s primary goal is to reduce inflation. How can it use open market operations to achieve this goal? What is a possible adverse effect of such action by the Fed (even if it achieves the goal)?

9. Monitoring Money Supply Why do financial market participants closely monitor money supply movements?

10. Monetary Policy during the Credit Crisis

Describe the Fed’s monetary policy response to the credit crisis.

22. The Fed’s Impact on the Housing Market In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods, when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fed’s monetary policy and thereby affect home prices?

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