Question

1-  Please list and briefly explain the goals and tools of monetary policy.

2-  Suppose the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is –2.0%. According to the Taylor Rule, how much should be the Federal Reserve's target federal funds rate? Please show your work

Answer 1

1.) The goals of monetary policy may be listed as follows:

• The most important objective of monetary policy is controlling the inflation rate.
• The second most important goal is reducing unemployment.
• The third most important objective is to promote long term moderate interest rate.

Tools of monetary policy is as follows:

• open market operations
• changing reserves requirements
• changing the discount rate.

2.)