Chapter 14 - Assignment 2: Monetary Policy and Inflation
Read the article entitled: "Keep the M in Monetary Policy" by William Poole. (The graphs are
missing, but the discussion is clear so this should not harm the exposition.)
- What evidence does the author present to suggest that in the long-run (and across countries),
the primary determinant of inflation is the rate of money growth?
- Why would the correlation between money growth and inflation be zero if the monetary
authorities are trying to keep the inflation rate low and stable? In particular, why would the
central bank have to change the rate of growth in the money supply to maintain a constant
inflation rate? (Hint: recall the quantity equation of money discussed on pp. 347-350 of your text.)
- Suppose that the Fed is attempting to maintain a constant (and low) inflation rate. If the
rate of growth in real output is constant, what would the Fed have to do to the rate of growth
in the money supply when the velocity of money increases? Why?
[ Chapter 14
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