Class 16 - Econ 350 U.S. Financial Systems, Markets and...

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Econ 350 U.S. Financial Systems, Markets and Institutions Class 16 Econ 350 U.S. Financial Systems, Markets, and Institutions Class 16: Monetary policy—goals and targets Good morning! Today we will finish up with monetary policy by examining the goals and targets of the Fed, the history of monetary policy, and the Taylor Rule. For the rest of the week, we will explore monetary theory and how changes in the money supply affect the macroeconomy. Course Objectives After today’s class, you should -- know the goals that the Fed tries to achieve through the implementation of monetary policy. -- understand the relationship between tools, targets, and goals. -- comprehend the differences between targeting the money supply and targeting interest rates. -- be familiar with the history of monetary policy as implemented by the Fed. -- know the Taylor Rule. Goals of Monetary Policy Briefly, there are six major goals of monetary policy. These are: 1. high employment (or low unemployment) 2. economic growth 3. price stability 4. interest rate stability 5. stability of financial markets 6. stability of foreign exchange markets High employment The goals of fostering high levels of employment with stable prices are contained in the Full Employment and Stabilization Act of 1946 and the Humphrey-Hawkins Balanced Growth Act of 1978. These acts call on Congress to assure that both the unemployment rate and the inflation rate are kept to a minimum. For the most part, Congress has delegated these powers over monetary policy to the Federal Reserve System. High rates of unemployment impose two costs on society: the economic costs of lost output due to unemployed resources, and the social costs of higher crime rates, more domestic violence, and more drug and alcohol abuse. High rates of unemployment impose both economic costs as well as the social costs of human misery. For this reason, it is desirable to keep unemployment rates low. Some amount of unemployment is desirable, however, as technology makes some types of jobs obsolete, and as workers leave old jobs to seek better jobs. Structural unemployment results from technological change. Frictional unemployment occurs when workers gain new skills or try to find better jobs. Both of these can make labor markets more productive. So it is not desirable to have an unemployment rate of zero, since that would mean that workers are stuck in the same jobs their whole lives or that there would 141
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 16 be no technological change. The level of unemployment consistent with stable prices that the Fed strives for is known as the “Natural Rate of Unemployment.” Natural Rate of Unemployment: A rate of unemployment greater than zero consistent with full employment where the demand for labor equals the supply of labor. Economic growth
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This note was uploaded on 05/09/2009 for the course ECON 350 taught by Professor Christianson during the Spring '08 term at Binghamton University.

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Class 16 - Econ 350 U.S. Financial Systems, Markets and...

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