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Chapter 17: Q.18 (page 468)

鈥淚f the demand for reserves did not fluctuate, the Fed could pursue both a reserves target and an interest-rate target at the same time.鈥� Is this statement true, false, or uncertain? Explain

Short Answer

Expert verified

True. In such a world, hitting a reserves target would imply that the Fed would likewise hit its interest-rate target or the other way around.

Step by step solution

01

Concept Introduction

Reserve Target implies target level of Available Fund Balance/Unrestricted Funds uses . A Target interest rate alludes to a given level of an interest rate with which the national bank tries to impact short-term interest rates, as a component of its monetary policy strategy.

02

Explanation

True. In such a world, hitting a reserves target would imply that the Fed would likewise hit its interest-rate target or the other way around. Consequently, the Fed could seek after both a reserves target and an interest-rate target simultaneously, yet provided that there was no variety in reserve demand.

03

Final Answer

True. In such a world, hitting a reserves target would imply that the Fed would likewise hit its interest-rate target or the other way around.

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Most popular questions from this chapter

The Fed鈥檚 maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its 2%goal for personal consumption expenditure price inflation. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and a measure of the natural rate of unemployment (NROU). For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago鈥� to convert the data to the inflation rate; for the unemployment rate, change the frequency setting to 鈥淨uarterly.鈥� Download the data into a spreadsheet. Calculate the unemployment gap and inflation gap for each quarter. Then, using the inflation gap, create an average inflation gap measure by taking the average of the current inflation gap and the gaps for the previous three quarters. Now apply the following (admittedly arbitrary and ad hoc) test to the data from 2000:Q1 through the most recent data available: If the unemployment gap is larger than 1.0for two or more consecutive quarters, and/ or the average inflation gap is larger in absolute value than 0.5for two or more consecutive quarters, consider the mandate 鈥渧iolated.鈥�

a. Based on this ad hoc test, in which quarters has the Fed 鈥渧iolated鈥� the price stability portion of its mandate? In which quarters has the Fed 鈥渧iolated鈥� the maximum employment mandate?

b. Is the Fed currently 鈥渋n violation鈥� of its mandate?

c. Interpret your results. What does your response to part (a) and the data imply about the challenge that monetary policymakers face in achieving the Fed鈥檚 mandate perfectly at all times?

鈥淪ince financial crises can impart severe damage to the economy, a central bank鈥檚 primary goal should be to ensure stability in financial markets.鈥� Is this statement true, false, or uncertain? Explain.

. The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately after the meeting. Find the schedule of minutes and press releases under the 鈥淢eeting calendars and information鈥� tab at http://www.federalreserve.gov/fomc/.

a. When was the last scheduled meeting of the FOMC? When is the next meeting?

b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates?

c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members?

What methods have inflation-targeting central banks used to increase communication with the public and to increase the transparency of monetary policymaking?

What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

a. Unemployment rises due to a recession.

b. An oil price shock causes the inflation rate to rise by 1%and output to fall by 1%.

c. The economy experiences prolonged increases in productivity growth while actual output growth is unchanged.

d. Potential output declines while actual output remains unchanged.

e. The Fed revises its (implicit) inflation target downward.

f. The equilibrium real fed funds rate decreases
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