1. ___________ (Inside/Outside) lags are longer for the Fed.
2. Experimental evidence shows us that individuals perform ________ than committees in making monetary policy decisions.
3. Long-term interest rates can be thought of as ________of short-term rates.
4. The Fed directly controls long-term interest rates. ________ (True/False)
5. Open Economies and Outside Lags in Monetary Policy. Research suggests that the effects of monetary policy through interest rates, exchange rates, and net exports are more rapid than the effects of monetary policy on investment. As an economy becomes more open, how will this change affect the outside lag in monetary policy?
6. Asset Prices as a Guide to Monetary Policy? Some central bankers have looked at asset prices, such as prices of stocks, to guide monetary policy. The idea is that if stock prices begin to rise, it might signal future inflation or an overheated economy. Are there any dangers to using the stock market as a guide to monetary policy?
7. Rates on Two-Year Bonds and One-Year Bonds. Suppose the interest rate on a two-year bond was higher than the interest rate on a one-year bond. What does the market believe will happen next year to one-year interest rates?
8. International Influences on Fed Policy. As international trade becomes more important, monetary policy becomes more heavily influenced by developments in the foreign exchange markets. Go to the Web page of the Federal Reserve (www.federalreserve.gov) and read some recent speeches given by Fed officials. Do international considerations seem to affect policymakers in the United States today?
9. Are Federal Reserve Chairmen Too Powerful? Economic research has shown that the chairman of the Federal Reserve is more powerful, relative to other committee members, than the head of the central bank in other countries. Fed chairpersons have much more influence over actual decisions than other members. Recall Professor Blinder s findings that committees make better decisions than individuals and that leaders of groups, per se, do not matter for the quality of decision making. Make an argument that the tradition of a strong chairman in the United States reduces the effectiveness of monetary policy.
10. Should the Fed Adopt a Fixed Formula for Monetary Policy? Some economists suggest that the Fed should follow an explicit rule or formula for monetary policy. For example, the rule would specify how interest rates would change based on changes in real GDP and inflation. Only with a fixed rule, these economists argue, would the public really understand the Fed s future intentions for policy. What are some of the disadvantages of adopting an explicit rule or formula?