Chapter 11, Monetary Policy and the Fed Video Solutions, Principles of Macroeconomics

Problem 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?

Kaylee Mcclellan

Numerade Educator

02:09

Problem 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?

Jennifer Stoner

Numerade Educator

06:44

Problem 3

Do you think the Fed should be given a clearer legislative mandate concerning macroeconomic goals? If so, what should it be?

Md.Daniyal Arshad

Numerade Educator

01:00

Problem 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?

Kaylee Mcclellan

Numerade Educator

00:56

Problem 5

In a speech in January $1995,{ }^{[36]}$ 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 antiinflation, 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?

Erwin Antoni

Numerade Educator

01:08

Problem 6

In a speech in August $1999,{ }^{[37]}$ 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?

Erwin Antoni

Numerade Educator

02:09

Problem 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?

Xiaomin Bian

Numerade Educator

00:15

Problem 8

Suppose the price level 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?

Dushyant Barot

Numerade Educator