1. Discuss why the Fed use the “core” measure of inflation in its forecasts.

The Federal Reserve has for sometime now used the “core” measure of inflation when determining inflationary trends. The core rate excludes the volatile prices of energy and food. They do this to take out the spikes in the data and produce a measure that they believe is a better indicator of long-term inflation in the economy.

2. Give a brief discussion of what you think monetary policy will look like in the near future based on the information in the article.

Probably the best indicator of future monetary policy lies in the comment that the core rate is likely to be within the acceptable range of the Federal Reserve. This range is generally accepted to be somewhere between 1 and 2.5 percent. If the number is in the range, as indicated by the article, monetary policy makers are basically going to hold the status quo. On the other hand, if inflation is outside the range then policy makers will use the tools of monetary policy to restore inflation to the acceptable range. For a discussion of this notion of an acceptable range, go to http://www.federalreserve.gov/Boarddocs/Speeches/2003/20031017/default.htm

Multiple Choice/True False Questions