Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 26 The Process of Monetary Policy Formulation.

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Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 26 The Process of Monetary Policy Formulation

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. A Conceptual Overview of the Macroeconomic Policy Process Policy Goals Stable Prices Sustainable GDP Growth Full Employment Satisfactory External Balance Alter GuidePolicy Actions Spending Saving Borrowing Lending Expected Economic Performance

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Lags in the Policy Process Policy makers decide what to do. Recognition Lag Policy Lag Impact Lag A change in the economy occurs. The change is recognized. Policy makers act. Time A BCD

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Maintaining an Interest Rate Target Interest Rate Quantity of Money MS D MS' iTiT D'D'

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Targeting Both an Interest Rate and an Aggregate ???? Interest Rate Quantity of Money MS D MS' iTiT D'D' i'i' MTMT MIMI

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. Economic Projections for 2001 and 2002 in Percents Change, fourth quarter to fourth quarter 1 Nominal GDP Real GDP 2 PCE prices Average level, fourth quarter Civilian unemployment rate Change, fourth quarter to fourth quarter 1 Nominal GDP Real GDP 2 PCE prices Average level, fourth quarter Civilian unemployment rate 1 Change from average for fourth quarter of previous year to average for fourth quarter of year indicated. 2 Chain-weighted SOURCE: Monetary Report to the Congress (July 2001). 3¼ to 5 1 to 2 2 to 2¾ 4¾ to 5 3½ to 4¼ 1¼ to 2 2 to 2½ 4¾ to 5 Board of Governors and Reserve Bank Presidents IndicatorRangeCentral Tendency ¾ to 6 3 to 3½ 1½ to 3 4 ¾ to 5½ 5 to 5½ 3 to 3¼ 1¾ to 2½ 4¾ to 5¼