Financial Markets, Banking, and Monetary Policy

CHAPTER 13 Monetary Policy: The Basics

WHAT YOU WILL LEARN IN THIS CHAPTER

• What causes inflation.
• Why stable prices (or low inflation) has become a primary goal of monetary policy around the globe today.
• How the goals of the U.S. central bank tend to differ from those elsewhere.
• How measures of prices and inflation are calculated.
• How the degree of resource utilization is determined, notably in the labor market.
• How fast the economy can grow on a sustainable basis.
• How changes in unemployment are related to economic growth and the rate at which the economy must grow for unemployment to fall.
• How the central bank affects the position of the economy by influencing aggregate demand.
• What happens when the economy is operating at a subpar level.
• What happens when it is overheating.
• What is meant by an output gap.
• How inflation expectations fit into the picture.
• How a central bank goes about lowering inflation.
• How a central bank goes about boosting a subpar economy.

BACKGROUND

Chances are that the financial crisis and the damage it caused to the macroeconomy—the Great Recession—continue to affect you. It also created one of the most serious challenges to the Fed in its first century. Moreover, worries on the inflation front have shifted from being on the side of rising inflation—where they had been since the 1960s—to being on the side of disinflation in recent years. Were you aware that the United States and many other industrial nations faced double-digit inflation in the late ...