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19. Impact of Inflation Targeting by the Fed.

Assume the Fed adopts an inflation-targeting


strategy. If oil prices rise abruptly by 15 percent in response to an oil shortage, describe how the
Feds monetary policy would be affected by this situation. Do you think the inflation-targeting
strategy would be more or less effective in this case than if the Fed balances its inflation
concerns with unemployment concerns? Explain.
ANSWER: If the Fed uses an inflation targeting strategy, it will need to use a tight (restrictive)
monetary policy in response to the oil price shock so that it can attempt to slow economic growth
and reduce pressure on inflation. However, in this situation, the inflation is caused by an oil
shortage, not by an excessive demand for products. Therefore, the policy will not necessarily
cure the oil price shock, and could also cause a recession.

20. Monetary Policy Today. Assess the economic situation today. Is the administration more
concerned with reducing unemployment or inflation? Does the Fed have a similar opinion? If
not, is the administration publicly criticizing the Fed? Is the Fed publicly criticizing the
administration? Explain.
ANSWER: The Monetary Policy undertaken by Bangladesh Bank in general pursues dual
objectives of maintaining price stability and supporting faster e economic growth of the country.
It tries to influences real sector price levels via financial sector prices by intervening policy
interest rate (repo, reverse repo rate) as well as seeks to influence real sector prices via quantity
theory based money stock targeting; monetary programs work out target growth paths for broad
money (M2) and its sub aggregates, implemented by day to day management of growth path of
reserve money (RM), currency in issue and balances of banks/financial institutions with the
Bangladesh Bank. It may be noted that the main monetary policy instruments available to the
Bangladesh Bank are open market operations, bank reserve requirements, interest rate policy, relending and re-discount (including using the term repurchase market), and credit policy (often
coordinated with trade policy).
The Gross Domestic Product (GDP) in Bangladesh expanded 6.01 percent in 2013 from the
previous year. GDP Growth Rate in Bangladesh averaged 5.62 Percent from 1994 until 2013,
reaching an all time high of 6.71 Percent in 2011 and a record low of 4.08 Percent in 1994. GDP

Growth Rate in Bangladesh is reported by the Bangladesh Bank. In which growth rate in
agriculture 3.35%, industry 8.39%, and service is 5.83% and overall growth rate is 6.16%.
Bangladesh gross national income increase to 138.1 billion dollar and per capita national income
892.5dollar. Unemployment Rate in Bangladesh is 5.1%. Present non-food point-to-point
inflation rate is 5.55%, point to point food inflation is 8.56% in June 2014. Overall average
inflation is 7.35% June 2014. In rural area inflation rate is 7.07% and urban area inflation rate is
7.89%.Present general consumer price index is 195.08tk in which food item index is 209.79tk
and non food item index is 209.79tk.

21. How the Fed Should Respond to Prevailing Conditions. Consider the existing economic
conditions, including inflation and economic growth. Do you think the Fed should increase
interest rates, reduce interest rates, or leave interest rates at their present levels? Offer some logic
to support your answer.