![]() The overall inflation rate depends on what is happening to prices on average. From one month to the next, some prices increase, others decrease, and still others stay the same. In turn, the price level in the economy is based on the prices of all the goods and services in an economy. is defined as the growth rate of the overall price level A measure of average prices in the economy. The inflation rate The growth rate of the price index from one year to the next. This policy, appropriately called inflation targeting, focuses the attention of the monetary authority squarely on forecasting inflation and then controlling inflation through its current policy choices. The policy of many central banks is directed toward the inflation rate. The statements by the Bank of England, the Central Bank of Egypt, and the Reserve Bank of Australia likewise betray a strong concern with inflation. It states that “inflation and longer-term inflation expectations remain well contained,” that “underlying inflation expected to be relatively low,” and that “the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” Federal Open Market Committee, “Press Release,” Federal Reserve, February 2, 2005, accessed July 20, 2011. Much of that announcement concerns inflation, not output. Look back at the Federal Open Market Committee (FOMC) announcement with which we opened the chapter. Remember, though, that the Fed is also charged with worrying about prices and inflation. According to the monetary transmission mechanism, we expect that this will result in lower spending and a lower real gross domestic product (GDP). We now understand the effect of an interest rate increase on output. What are the effects of monetary policy on prices and inflation?.zip file containing this book to use offline, simply click here.Īfter you have read this section, you should be able to answer the following questions: You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license. ![]()
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