This and the following two articles substitute for longer treatments in the textbook.

This and the following article discuss recent developments in U.S. monetary policy and the reaction of financial markets to those developments. What developments do the articles describe? How did the financial markets react? What do these reactions say about (the market’s perceptions of) the effect of monetary policy on the economy?

In answering these questions, you might first want to see if you know the answers to some more basic questions. The Federal Reserve sometimes acts so as to "tighten" or "loosen" monetary policy, and these terms are generally used to refer to actions that affect interest rates. When the Federal Reserve loosens, what interest rate is generally affected, and in which direction? What specific actions does the Federal Reserve take in order to accomplished this change in interest rates? What is the major reason for loosening monetary policy?

This article discusses the common view "that a joblessness rate of under 6% is the threshold at which wage increases and higher prices start to accelerate." According to press reports, many Federal Reserve officials agree with this reasoning and believe that real GDP cannot grow faster than 2.5% per year without igniting inflation. (The Federal Reserve apparently believes that the economy's long-run real growth rate has declined to 2.5% per year.) This view has been the basis for tightening monetary policy on several occasions in recent years.

Critics of the Federal Reserve, some of whom are Senators and Congressmen, argue that the Fed keeps monetary policy too tight, artificially holding down the growth rate of real GDP. Suppose that the Federal Reserve permanently keeps the rate of money growth low. To a first approximation, how would this low rate of money growth affect unemployment? How would it affect the economy’s growth rate? What would be the long-run effects of low money growth? Why would Senators and Congressmen object to tight monetary policy? (The additional reading "Fed Putting a Crimp on Economy, Critics Say" contains more information on this debate.)

See the discussion question below.

Sometimes easy money is equated with low interest rates and tight money with high rates. How does more rapid money growth affect interest rates in the short run? In the long run? What happened to nominal interest rates in the mid-1980s? What caused this?

This article discusses the relation between a country’s average inflation rate and the degree of independence of its central bank. Is greater independence associated with higher or lower inflation? What might account for this finding?

This article discusses the term structure of interest rates as a predictor of recessions. Describe the empirical regularity discussed in the article. What might account for this finding?

This and the following article discuss the effect of the banking system on the recent economic problems of several East Asian countries? How could problems in the banking system contribute to such problems? What are some possible reforms to the banking system that might reduce the likelihood that similar problems will occur in the future?

See the discussion question above.