Chapter 25: Q.21 (page 676)
What traits characterize a “conservative” central banker?
Committed to maintaining low and steady inflation is the trait of conservative central banker.
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If the public expects the Fed to pursue a policy that is likely to raise short-term interest rates permanently to 5%, but the Fed does not go through with this policy change, what will happen to long-term interest rates? Explain your answer.
Suppose the central bank is following a constant-money-growth-rate rule and the economy is hit with a severe economic downturn. Use an aggregate supply and demand graph to show the possible effects on the economy. How does this situation reflect on the credibility of the central bank if it maintains the money growth rule? How does it reflect on the central bank's credibility if it abandons the money growth rule to respond to the downturn?
Suppose an econometric model based on past data predicts a small decrease in domestic investment when the Federal Reserve increases the federal funds rate. Assume the Federal Reserve is considering an increase in the federal funds rate target to fight inflation and promote a low inflation environment that will encourage investment and economic growth.
a. Discuss the implications of the econometric model’s predictions if individuals interpret the increase in the federal funds rate target as a sign that the Fed will keep inflation at low levels in the long run.
b. What would be Lucas’s critique of this model?
Why did the oil price shocks of the affect the economy differently than the oil price shocks of ?
How is constrained discretion different from discretion in monetary policy? How are the outcomes of these policies likely to differ?
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