Question

Consider these two quotes concerning recent Federal Reserve policy

On December​ 12, 2012 the Federal Reserve issued the following​ statement:

​"In particular, the Committee decided to keep the target range for the federal funds rate at 0 to​ 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5​ percent."

On July​ 10, 2013, Ben​ Bernanke, Chairman of the Federal Reserve​ said:

​"There will not be an automatic increase in interest rate when unemployment hits​ 6.5%."

Why do both quotes focus on what policy will be in the​ future, rather than just explain what the Fed is doing in the​ present?

A.

Because decisions by consumers and firms today are significantly influenced by their expectations for the future.

B.Present Fed efforts likely need little or no explanation as they​ are, as far a decision makers are​ concerned, a fait

accompli.

C.

They reveal that officials are cognizant of the importance to consumers and firms of future developments.

D.

all of the above.

E.

A and B only.

The Fed Chair likely made the second statement to

A.

reserve for the Fed some flexibility to respond to unexpected events.

B.

keep Wall Street a bit​ off-balance.

C.

negate any perception that the Fed was locked into a policy​ change, certainly not one based on a single variable of questionable reliability.

D.

all of the above.

E.

Only A and C are plausible.

On January​ 25, 2012, while the nominal policy interest rate was at the zero lower​ bound, the Federal Reserve announced

an inflation target of​ 2%. The goal of this announcement was likely to

A.

allay any fears that high inflation would be tolerated.

B.

give households and firms some degree of certainty with respect to future monetary policy.

C.

give the Fed some wiggle room if a recession arises.

D.

all of the above.

E.

B and C only.

Answer 1

Answers:

A. Because decisions by consumers and firms today are significantly influenced by their expectations for the future.

Option A is correct because as the economic actions and manoeuvres taken by consumers and firms today or in the near future are heavily influenced by the expectations of the nature of the economic climate in the future.

E. Only A & C are plausible.

This is a clear answer. The only two plausible reasons for the chair to make such a statement would be to allow the fed to have some room for flexibility and make decisions as per the prevailing situation. Another reason being, the chair would want to nullify any perceptions that the fed was set on adopting a policy change once the unemployment rate hit 6.5%

B. Give households and firms some degree of certainty with respect to future monetary policy.

The setting of an inflation target serves the purpose of a central bank strategy to aid the in anticipating the nature of future monetary policy adjustments and manoeuvres.