Chapter 15 Part 3 Help Me Waaaaaa

Monetarists say what about the Fed targeting the money supply?

They say YES

Friedman advocated for what monetary principle?

A monetary growth rule

What is a monetary growth rule?

Increasing the money supply at about he long-run rate of real GDP growth

Why is monetarism no longer popular?

Because the link between the money supply and real GDP seems to have broken down

M1 changes “wildly” but real GDP does not behave like that

Is targeting the money suppky seriously considered?

No

Who developed the Taylor rule?

John Taylor of Stanford University

Federal funds target rate:

current inflation rate + equilibrium real federal funds rate + [1/2 x inflation gap] + [1/2 x output gap]

What is inflation targeting?

A guideline for marketing policy that entails the central bank announcing its target level of inflation

What is the typical outcome when adopting inflation targeting?

Inflation is lower, unemployment is (temporarily) higher

In 2012 the Fed announced its first explicit inflation target:

an average inflation of 2 percent over time.

What are the three arguments for inflation targeting?

1. Makes it clear that the Fed cannot affect real GDP in the long run

2. Easier to form future expectations about inflation

3. Promotes fed accountability

   These arguments suggest that inflation targeting enhances transparency in monetary policy, stabilizes inflation expectations, and holds the Federal Reserve responsible for maintaining price stability.

What are three arguments against inflation targeting?

1. Reduces the Fed’s flexibility for other policy goals

2. sumes the Fed can accurately forecast inflation rates, which isn’t necesarily true

3. Less likely to address other goals

Which inflation rate does the Fed actually pay attention to?

The PCE (personal umption expenditures) index

What is a bubble?

A bubble is a situation in which prices are too high relative to the underlying value of the asset

Bubbling can form due to two factors:

Herding behavior

Speculative behavior