U.S. Monetary Policy: An Introduction. Part 2: What Are the Goals of U.S. Monetary Policy?

1. Define the following terms used in the reading:
   1. maximum sustainable output and employment
   2. business cycle
   3. inflation risk premium
   4. disinflation
   5. deflation
   6. price stability

2. What determines the economy's maximum sustainable output and employment in the long run? Can the Fed alter these long-run factors? Explain.

3. Describe the various ways high inflation can impede economic growth.

4. What are the arguments against a goal of zero inflation?

5. Should the Fed focus only on the long run? Why?

6. How might the stock market influence monetary policy?

Source: "U.S. Monetary Policy: An Introduction. Part 2: What Are the Goals of U.S. Monetary Policy?" Federal Reserve Bank of San Francisco FRBSF Economic Letter, No. 2004-02, January 23, 2004.