Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1. Do you think, in the interest of transparency, the Chair of the Federal Reserve
or why not? (LO2)
Answer: Since 2012, the Fed Chair has conducted quarterly press conferences
following those FOMC meetings where members’ quantitative economic and
policy rate forecasts are published. This practice mirrors the communications
can lead to confusion and uncertainty when the decisions themselves are unclear
or contentious.
2. Suppose a fellow student in your money and banking class made the following
On what basis could you disagree with this student? (LO1, LO3)
Answer: Expressing a numerical target for inflation but not for the maximum
employment element of the mandate does not imply that greater importance is
conflict, it will take a “balanced approach”, emphasizing the equal standing of
both parts of the mandate.
3. Compare the communication strategies of the Federal Reserve and the ECB. In
justified in omitting each of them. (LO1, LO3)
Answer: The communication strategies of the Fed and the ECB share many
common elements: they both immediately release the target interest rate with a
research.
In contrast to the ECB, the Fed makes public the votes of individual votes of the
publishes transcripts of its meetings after a five-year lag.
Not publishing votes of Governing Council members can be justified on the basis
that it makes it more feasible for members who represent individual countries to
published with a long lag.
4. During the euro-area crisis, interest-rate spreads between the sovereign debt of
pattern?
Data Exploration
1. How large are the public debt burdens of key euro-area economies? Are they
rising or falling? Plot the debt-to-GDP ratios of Germany (FRED code:
consistent with the Maastricht Treaty’s public debt-to-GDP guideline of 60
percent? (LO4)
Answer: As of 2015, even Germany, the largest and perhaps the healthiest of the
big euro-area economies, has a debt-to-GDP ratio above the 60% guideline for the
projects some improvement for Italy, but from an elevated level.
International Monetary Fund, General government gross debt for Germany© [GGGDTADEA188N], retrieved from
FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GGGDTADEA188N.
International Monetary Fund, Projection of General government gross debt for Germany© [GGGDTPDEA188N],
retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GGGDTPDEA188N.
International Monetary Fund, General government gross debt for Italy© [GGGDTAITA188N], retrieved from FRED,
Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GGGDTAITA188N,
International Monetary Fund, Projection of General government gross debt for Italy© [GGGDTPITA188N], retrieved
from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GGGDTPITA188N.
2. The European Central Bank (ECB) has translated its primary objective of price
stability into an explicit, quantitative goal of keeping euro-area annual inflation
compute the average inflation rate for the full period and for the periods
2008-2009, 2010-2011, and 2012-present. (LO4)
Answer: The plot is shown below. Over short periods, measured inflation varies
significantly as a result of temporary price disturbances that do not affect the trend
of inflation. Moreover, monetary policy changes influence inflation only with a
the ECB is pursuing expansionary policies to raise the euro-area inflation rate
toward its goal of just below 2 percent.
Eurostat, Harmonized Index of Consumer Prices: All Items for Euro area (19 countries)© [CP0000EZ19M086NEST],
retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CP0000EZ19M086NEST.
3. In 2012, the Federal Reserve announced an inflation objective of 2 percent “over
the longer run” for the personal consumption expenditures price index (FRED
averages and standard deviations over that period. What do you conclude? (LO2)
Answer: The core index is relatively useful for examining the trend of inflation,
because volatile components of the headline price index can mask its underlying
(versus 1.0 percent for the headline rate). The smaller standard deviation of the
core measure means that it is usually a more reliable signal of the underlying
inflation trend.
4. Its statement of July 27, 2016, indicated that the FOMC it would pursue policies
to meet its “objectives of maximum employment and 2 percent inflation.” Plot
since 2009 the evolution of the FOMC’s longer-run projection for the
time “below levels that are expected to prevail in the longer run.” (LO2)
Answer: The midpoint of the projections of members of the FOMC reflects the
median estimate of the “normal” unemployment rate consistent with “maximum
employment.” By mid-2016, the actual unemployment rate had reached that level.
However, inflation as measured by the percent change from a year ago of the core
that its inflation target is symmetric, meaning that it is not biased in favor of
inflation that is somewhat above 2 percent or somewhat below 2 percent.
5. In August 2007 and in March 2008, the Federal Reserve Board reduced the
discount rate to ease liquidity conditions for banks. Plot discount window
funds target rate trigger the borrowing surge in September-October 2008? (LO2)
Answer: The data plot is below. The data show no immediate effect from the
discount rate cut in August 2007 (that narrowed the spread to 50 basis points) and
(see Chapter 3 Lessons from the Crisis: Interbank Lending), not the March change
in the discount rate.
* indicates more difficult problems
