Monetary Policy HW1

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ECON 4385 Monetary Policy Homework 1

Answer all three questions. Do not write more than one-half page per question with 12 point type and a minimum of 1.15 line spacing.

1. What are the goals of monetary policy? How do changes in the Federal Funds Rate (FFR) work to achieve the goals? How has the way the Fed sets the FFR changed since 2008?

2. What are the three key principles for the conduct of monetary policy? What is the Taylor rule? How does the Taylor rule satisfy these principles?

3. In a New Keynesian model with an IS curve, Taylor Rule, and Phillips Curve, show, using both words and algebra, how the Taylor Principle is both necessary and sufficient for a shock to inflation to not cause a permanent increase in inflation.