2. The tradeoff faced by a central bank Aa Aa Policymakers and economists use sp

Question

2. The tradeoff faced by a central bank Aa Aa Policymakers and economists use specific terms to describe central bank decisions. They say that monetary policy is accommodative, or relaxed, if interest rates are set at relatively low levels to speed up economic growth. They say that policy is neutral if interest rates are neither speeding up growth nor slowing it down. And they say it is tight, or firm, if interest rates are set high enough to slow the rate of growth and reduce the inflation rate. Based on the FOMC press release of June 22, 2011, how would you classify the Fed's current policy stance? O Relaxed, with the potential to remain relaxed for an extended period O Extremely tight, but likely to relax in the future O Moderately tight, with the potential to become tighter if necessary What are the FOMC's main concerns? Check all that apply. slower than expected economic recovery Unexpectedly high inflation Low rates of resource utilization

Explanation / Answer

1.Relaxed

2. Lower than expected economic recovery

and Low rates of resource utilization

3. Graph B

Here is the press release for reference

Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.  Also, recent labor market indicators have been weaker than anticipated.  The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan.  Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.  Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions.  However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate.  Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.

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