1. Discuss the key criteria for success and the advantages of a central bank adopting the framework of inflation targeting.
2. Consider the features of a desirable monetary policy instrument. Is the size of the Federal Reserve staff good policy instrument? Explain why or why not. Be sure to address which feature(s) it fits and which one(s) it doesn't.
3. Federal Reserve buying of mortgage-backed securities is an example of a targeted asset purchase, an unconventional tool of monetary policy. Explain how the Fed’s actions are intended to work.
4. Recall the liquidity premium theory of the term structure of interest rates from chapter 7. Use this theory to explain how forward guidance about monetary policy can lower long-term interest rates today. Be sure to account for both future short-term rates and for the risk premium. How does the effectiveness of forward guidance depend on its time consistency?