monetary policy essay questions

Monetary Policy Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory

Monetary Policy Definition: – Monetary policy occurs when the government uses interest rates or money supply to change the level of aggregate demand (AD) and national income (GDP) in the economy. – Interest rates is the monetary gain from lending money, and also the monetary cost of borrowing money. – Money supply is the total amount of money circulating an economy, generally referring to cash and bank deposits/balances.

Monetary Policy Examples & Explanation: Monetary policy is a type of demand-side policy, as it helps the government achieves its macroeconomic objectives by changing AD. A decrease in interest rates is a common response to a negative economic shock or downturn, for example during the 2008 Financial Crisis and the recent Coronavirus Epidemic . This is because a fall in interest rates leads to a lower cost to borrow for businesses and individuals. This incentivises them to increase their borrowing for investment or consumption, and as a result will increase AD, stimulating the economy. Although this works in theory, it can be hard to imagine a Hawaiian pizza place securing a loan to open up a second store during the pandemic. Another issue with lowering interest rates is they may not be able to be lowered even further (e.g. imagine if interest rates are already at 0.1% to start with). As a result, governments may implement quantitative easing which affects the money supply of the economy instead.

Monetary Policy Economics Notes with Diagrams

There are considerations of having a negative or zero interest rates when the economy is depressed. UK small businesses are offered loans with zero interest during the pandemic, and this is mainly for them to meet their costs and survive. When interest rate turns negative, it means that banks charge depositors (lenders) and pay borrowers. This will incentivise savers in the economy to consume, and increase borrowing, but put more pressure on banks like in Japan.

Monetary Policy Video Explanation – EconPlusDal

The left video explains monetary policy, the right evaluates the advantages and disadvantages of the policy.

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AP®︎/College Macroeconomics

Course: ap®︎/college macroeconomics   >   unit 4.

• Monetary policy tools

Lesson summary: monetary policy

• Monetary policy: foundational concepts
• Using monetary policy to affect the economy

Lesson Summary

Key takeaways, the tools and outcomes of monetary policy, monetary policy can be used to achieve macroeconomic goals, the three traditional tools of monetary policy, banking systems with ample reserves.

How does this affect the demand for reserves?

Demand for reserves is inversely related to the federal funds rate. If the federal funds rate is high, commercial banks prefer to loan money out to other banks to earn higher returns. On the other hand, if the federal funds rate is low, banks are more inclined to deposit money with the central bank and earn IOR, instead.

Open market operations change the monetary base, but the impact on the money supply is larger due to the money multiplier

Central banks usually target overnight interbank lending rates with omos, monetary policy influences aggregate demand, real output, the price level, and interest rates, the limitations of monetary policy, key graphical models, common misperceptions.

• It might seem like a time-saver to skip steps when describing the chain of events involved in monetary policy, but taking an extra minute or two is worth it. If you want to save time, use abbreviations and arrows rather than skipping steps. For example, if you want to communicate this: “*An increase in the money supply will lower interest rates, which will increase investment and aggregate demand. As a result, output will increase, the price level will increase, and the unemployment rate will decrease.” You could write instead: “Ms ↑ → n.i.r. ↓ → I ↑ → AD ↑ → (Y ↑ PL ↑ UR ↓)”
• If a question asks you for an open market operation , you might think it’s a good idea to list all of the tools of monetary policy. This is not a good idea, because you haven’t answered the question that was asked and you won’t get any credit. Instead, only give an answer to the question you are asked so you get full credit.

Discussion questions

• The economy of Fredonia has experienced the demand shock shown here:
• The AD-AS model is illustrating an inflationary gap. Therefore contractionary monetary policy is appropriate. The O.M.O. to use in this circumstance is to sell bonds.
• The AD curve decreases. The increase in interest rates will decrease investment. The decrease in investment will decrease AD.
• This will cause the price level to decrease. When the AD curve decreases, the price level decreases
• The unemployment rate will increase. When the AD curve decreases, output will decrease. Fewer workers will be needed to produce less output, so the unemployment rate will increase.

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Macro Economic Essays

These are a collection of essays written for my economic blogs.

Exchange Rate Essays

• Effects of a falling Dollar
• Why Dollar keeps falling
• Discuss Policies to Stop the Dollar Falling
• Does Devaluation Cause Inflation?
• Benefits and Costs of Falling Dollar
• Reasons for Falling Dollar
• The Dollar as the World’s Reserve Currency

Economic Growth Essays

• Evaluate Benefits of Economic Growth
• Essays on Recessions
• Causes of Recessions
• Problems of Recovering from a Recession
• What can Increase Long-Run Economic Growth?
• Discuss Effect of a fall in the Savings Ratio

Inflation Essays

• Discuss the Difficulties of Controlling Inflation
• Should the aim of the Government be to Attain Low Inflation?
• Explain What Can Cause a Sustained Increase in the Rate of Inflation
• Reasons for low inflation in the UK
• Inflation Explained
• Difficulties of Inflation targeting
• Hyperinflation

Unemployment Essays

• Explain what is meant by Natural Rate of Unemployment?
• Should the Main Macro Economic Aim of the Government be Full Employment?
• The True Level of Unemployment in the UK
• What explains low inflation and low unemployment in the UK?

Demand Side Policies

• Discuss effect of Expansionary demand-side policies on Balance of Payments and Environment
• Effects of a Falling Stock Market
• How do Mortgage Defaults affect and Economy?
• Discuss the effect of increased Government spending on education
• Phillips Curve – Trade-off between Inflation and Unemployment

Development Economics

• Why Growth may not benefit developing countries
• Does Aid Increase Economic Welfare?
• Problems of Free Trade for Developing Economies

Fiscal Policy

• Will US Economy benefit from Tax Cuts?
• Can Fiscal Policy solve Unemployment?
• Explain Reasons for UK Current Account Deficit
• Benefits of Globalisation for Developing and Developed Countries

Monetary Policy

• Discuss Effects of an Increase in Interest Rates
• How MPC set Interest Rates
• Benefits of High-Interest Rates (and recessions)
• Who Sets interest rates – Markets or Bank of England?

Economic History

• Economics of the 1920s
• What Caused Wall Street Crash of 1929?
• UK economy under Mrs Thatcher
• Economy of the 1970s
• Lawson Boom of the 1980s
• UK recession of 1991
• The great recession 2008-13

General Economic Essays

• The Dismal Science
• Difference Between Economists and Non Economists
• War and Recessions
• The Economics of Fear
• The Economics of Happiness
• Can UK and US avoid Recession?
• 3 Of the Worst Economic Policies
• Overvalued Housing Markets
• What Went Wrong with US Economy?
• Problem with Bailing out financial sector
• Problems of Personal Debt
• Problem of Inflation
• National Debt in the UK
• How To Survive a Recession
• Can A recession be a good thing?

Chinese Economy

• Problems of Chinese Economic Growth
• Should we worry about a strong China
• Chinese Growth and Costs of Growth
• Chinese Interest Rates and Economic Growth

Model essays

• A2 model essays
• AS model essays
• Top 10 Reasons For Studying Economics
• Inflation explained by Victor Borge
• Funny Exam Answers
• Humorous look at Subprime crisis

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• Online Lessons

Evaluating Monetary Policy (Online Lesson)

Last updated 28 Apr 2020

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In this online lesson, we cover some of the key approaches for evaluating the effectiveness of monetary policy. You may want to take a look at the lesson introducing monetary policy and the lesson for quantitative easing first.

WHAT YOU'LL STUDY IN THIS ONLINE LESSON:

• A review of the main types of macro policy and key aspects of monetary policy
• Evaluating monetary policy and its effectiveness by looking at why the interest rate transmission mechanism may not work in practice
• The need for alternative monetary policy approaches
• Inflation targeting
• Broader evaluation points

Additional teacher guidance is available at the end of this lesson.

Thank you to Peter McGinn and Jon Clark for their contributions to this lesson.

HOW TO USE THIS ONLINE LESSON

Follow along in order of the activities shown below. Some are interactive game-based activities, designed to test your understanding and application of monetary policy. Others are based on short videos, including activities for you to think about and try at home, as well as some extra worksheet-based activities.

If you would like to download a simple PDF worksheet to accompany the video activities, you can download it here: Evaluating Monetary Policy . You can print it off and annotate it for your own notes, or make your own notes on a separate piece of paper to add to your school/college file.

ACTIVITY 1: VIDEO - REVIEW OF THE TYPES OF MACRO POLICY

Test yourself against "The Cube" in this quick review activity of the different types of macro policy.

ACTIVITY 2: VIDEO - MONETARY POLICY KEY TERMS

Before we can address some of the key evaluation points for monetary policy, it's important to make sure that the essential monetary policy terminology is spot on! Check your knowledge in this quick review video.

ACTIVITY 3: GAME - MULTIPLE CHOICE QUESTIONS

Test yourself against the clock with these MCQs on monetary policy.

ACTIVITY 4: VIDEO - BREAKDOWN OF THE TRANSMISSION MECHANISM

For the last decade or so, changes to Bank Rate have not been as effective as they had been in the past. The interest rate transmission mechanism has broken down in parts. This video activity takes you through some of the reasons for this.

ACTIVITY 5: READING AND THINKING TIME - INFLATION TARGETS

From the 1990s onwards, a number of Central Banks decided to introduce inflation targets as part of their monetary policy approach.

For a brief overview of the UK's inflation target, take a look at the Bank of England information here . You can follow this up with a slightly more in-depth explanation of inflation targeting from the IMF here .

Next, take a look at this article from the Federal Reserve Bank of San Francisco on the pros and cons of inflation targeting. You could also read this opinion piece from CNBC , which considers whether inflation targets should be scrapped in light of the impact of COVID-19.

Finally, download this tutor2u resource On Target . On the 2nd page, you will find a series of statements regarding inflation targeting as a monetary policy. Some are advantages of this approach whilst others are disadvantages. Your task is to i) organise the statements into advantages and disadvantages ii) rank those statements from "most convincing" to "least convincing".

ACTIVITY 6: GAME - INFLATION TARGETS

In this Higher or Lower game, build your knowledge of how different economies approach inflation targeting.

ACTIVITY 7: VIDEO - UNCONVENTIONAL MONETARY POLICY

When Central Banks realised that the traditional interest rate transmission mechanism was not going to be as effective as they'd hoped following the Financial Crisis of 2007-2009, they had to turn to some alternative approaches. This video introduces you to some of these unconventional approaches to monetary policy.

ACTIVITY 8: SYNOPTIC THINKING

In your A level exams, you will need to be able to use your economics in a synoptic way i.e. making connections across different aspects and topics in your course. Download this tutor2u Synoptic Assessment Mat to help you practise this skill in relation to monetary policy.

ACTIVITY 9: VIDEO - GENERAL EVALUATION POINTS FOR MONETARY POLICY

In this final video for this lesson, we take you through some of the wider evaluation points for monetary policy.

ACTIVITY 10: DATA RESPONSE

The best way to work out how well you've understood the material in the online lessons on monetary policy is to have a go at some exam-style questions! We've put together a data response set of questions that you could tackle. If you are doing AQA Economics then download this AQA-style data response . If you are doing Edexcel Economics, then download this Edexcel-style data response . If you are following an alternative specification, ask your teacher which of these is the most appropriate for you.

ACTIVITY 11: ESSAY ANALYSIS

An effective way of learning how to write good essays is to read essays that would be awarded high marks in an exam and then analyse the reasons why they would be awarded high marks. You can have a go at this for the following two essays:

• Evaluating the effectiveness of inflation targeting as a tool of monetary policy
• Evaluating the impact of monetary policy on economic performance

Jot down some notes on the key features of these essays, and try highlighting the aspects of the essay that you might not have thought to include yourself if you had tackled that essay title.

EXTENSION READING

The Bank of England has produced a number of reports which aim to compare and contrast different approaches to monetary policy. T his paper focuses on comparing credit easing with quantitative easing, and is worth a read.

This transcript of a speech for the ECB considers why some commentators have regarded recent monetary policy as ineffective, and attempts to explain why they are wrong.

ADDITIONAL TEACHER GUIDANCE

This lesson comprises:

• around 30 minutes of guided video, spread over 5 videos, and supported by an accompanying worksheet
• around 20-25 minutes of student thinking time and activity, spread throughout those 5 videos
• an independent reading and ranking activity on inflation targeting, which could take students anywhere between 15 minutes and 1 hour, depending on their level of involvement
• 2 interactive games testing their application and knowledge of monetary policy
• a synoptic thinking activity (solutions available within the activity download)
• a suggested data response activity
• an essay-based activity, in which 2 example essays on monetary policy are provided (along with some examiner commentary) and students need to consider the strong features of these essays
• extension reading

We anticipate that the "core" of the lesson would take around one hour, with an extra 90 minutes for the written tasks. For the data response activity, there is a choice between an AQA-style and an Edexcel-style data response. Please advise your students which is the most appropriate for them, especially if you follow a different awarding body specification. You can find suggested answers to the AQA DR here and to the Edexcel DR here .

• Monetary policy
• Unconventional Monetary Policy
• Central Bank
• Inflation target
• Quantitative easing (QE)

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Policy has tightened a lot. how tight is it.

February 5, 2024

On May 6, 2022, I first  published an essay  explaining why I focus on long-term real rates to evaluate the overall stance of monetary policy, which includes effects from both the setting of the federal funds rate and changes to the Federal Reserve’s balance sheet. Please see that essay for a discussion of why long-term real rates drive economic activity rather than short rates or nominal rates.

On June 17, 2022 , and September 26, 2023 , I published updates to reflect actions by the Federal Open Market Committee (FOMC) to tighten policy in order to bring inflation back to our target. This essay is an update to those earlier commentaries to assess where we are in our inflation fight and highlight some important questions policymakers face.

Since my last update in September, two significant economic developments have occurred simultaneously: Inflation has fallen rapidly—more rapidly than most forecasters expected—and economic growth has proven remarkably resilient, even stepping up in the latter half of 2023.

The FOMC targets 12-month headline inflation of 2 percent. The fact that core inflation is making rapid progress returning to our target—as demonstrated by six-month core inflation coming in lower than 12-month, three-month coming in lower than six-month, and both now at or below target—suggests that we are making significant progress in our inflation fight (see Figure 1).

At the same time that inflation has made rapid progress toward our goal, real GDP growth has continued to show remarkable strength, as shown in Figure 2.

The labor market, the other half of our dual mandate, has also remained strong with the unemployment rate remaining at a historically low 3.7 percent.

How do we reconcile such strong real economic activity with falling inflation? Typically, if tight monetary policy were the primary driver of falling inflation, we would have seen falling inflation coupled with weak economic growth and a weakening labor market, perhaps including a material increase in unemployment. But that is not what we have experienced in recent quarters.

Instead of monetary policy doing the heavy lifting to bring inflation down, it appears that supply-side increases are boosting output and bringing supply and demand into balance, thus reducing inflation. I previously described  that high inflation was being driven by “surge pricing” dynamics, where demand was hitting the vertical part of the supply curve. By most measures, supply chains that had been disrupted during the pandemic have healed and there has been a strong boost to labor supply, increasing the economy’s potential output and bringing inflation down.

If supply-side factors appear to be contributing meaningfully to disinflation, what role has monetary policy played and how is it affecting the economy now? Monetary policy has played an enormously important role in keeping long-run inflation expectations anchored. It is hard to overstate how important that is for ultimately achieving the soft landing we are all aiming for. But to assess what impact policy is having on inflation going forward, we must first try to determine how tight monetary policy actually is.

Recent public commentary suggests that the real federal funds rate has tightened dramatically over the past several months because inflation has fallen rapidly while the nominal federal funds rate has remained unchanged. While I understand the math of this argument, I believe it overstates changes in the stance of monetary policy.

In prior essays I wrote that the single best proxy for the overall stance of monetary policy is the long-term real rate, specifically the 10-year Treasury inflation-protected securities (TIPS) yield. Focusing on a long-term rate incorporates the expected path of both the federal funds rate and balance sheet, not just the current level of the federal funds rate. Moreover, it adjusts the expected path of policy by expected future inflation—the relevant comparison—rather than by recently realized inflation.

While 12-month inflation has fallen 285 basis points (bps) over the past year—implying that the real federal funds rate has climbed 360 bps—Figure 3 shows that policy as indicated by 10-year TIPS has only increased about 60 bps on net. Now, one reason the 10-year TIPS yield has not moved up much while inflation has fallen is that the expected path of nominal rates has also fallen. If markets instead expected no change in the federal funds rate this year, then, all else equal, real rates would have moved up further.

The concept of a neutral stance of monetary policy is critical to assessing where policy is now and what pressure it is having on the economy. While we cannot directly observe neutral, economists have models to estimate it, which are imperfect even under normal economic circumstances. Our various workhorse models for the economy have struggled to explain and forecast the pandemic and post-pandemic periods given the extraordinary changes and disruptions the economy has experienced. So I also look to measures of economic activity for signals to try to evaluate the stance of policy.

To assess if monetary policy is tight, I start by looking at what are traditionally the more interest-rate-sensitive sectors of the economy for signs of weakness. Start with housing: While home sales are down relative to the pre-pandemic period, overall residential investment was flat in real terms in 2023. Construction employment has not fallen during our tightening cycle and instead continues to climb to all-time highs. While home price growth has slowed, prices have not fallen and are quite high by historical measures, contributing to record household wealth. Even the stock prices of homebuilders are near all-time highs.

Private nonresidential investment was up 4.1 percent in 2023, and consumption of durable goods was up 6.1 percent. And with the backdrop of low unemployment noted above, consumers continue to surprise with robust spending.

These data lead me to question how much downward pressure monetary policy is currently placing on demand.

But the data are not unambiguously positive, and there are some signs of economic weakness that I take seriously, such as auto loan and credit card delinquencies increasing from very low levels and continued weakness in the office sector of commercial real estate.

This constellation of data suggests to me that the current stance of monetary policy, which, again, includes the current level and expected paths of the federal funds rate and balance sheet, may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic. It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased. The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.

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9 key questions about monetary policy answered

Monetary policy tools.

Updated 11/3/2023 Jacob Reed 1. What is monetary policy?  Monetary policy is how a country’s central bank works to achieve the economic goals of price stability and full employment. Central banks use monetary policy tools to change interest rates. 

Those changes in interest rates change the quantity of investment (and other interest rate sensitive spending), which shifts the aggregate demand curve in the AS/AD model. That AD shift can change the price level to achieve price stability and change real output to achieve full employment.

2. What is Ample vs Scarce (limited) reserves?

Until recently the world’s economies operated in a system of scarce or limited reserves. That means banks loaned out nearly all of their excess reserves. With limited reserves in the banking system, small changes to the amount of bank reserves dramatically change the money supply and with that, the nominal interest rate in the money market. Central banks operating in a scarce reserves system use open market operations, the discount rate, and the reserve requirement to change the bank reserves and the nominal interest rate.

During the recession of 2008, the amount of reserves within the US banking system dramatically increased. Banks stopped loaning out nearly all of their excess reserves and old monetary policy tools became less effective at impacting the nominal interest rate. As a result, the Federal Reserve (and other central banks with an ample reserves system) must use new tools to change the nominal interest rate. The primary monetary policy tool is now Interest on Reserves.

In both systems, changes in the interest rate are used to achieve the goals of full employment and stable prices. Central banks work to lower interest rates to fight unemployment (to close a recessionary gap) and raise interest rates to fight inflation (to close an inflationary gap). 

3. How does Monetary Policy work in a scarce reserves system?

In a scarce reserves system, 3 tools are used to shift the money supply and change the nominal interest rate in the money market. Each of those tools is described below:

Open market operations (the preferred tool of central banks with a scarce reserves system) include just 2 things: buying and selling government bonds (securities). When central banks buy bonds, the bond sellers deposit the proceeds in checking accounts. That increases excess reserves in the bank, allowing them to make more loans. More loans increases the money supply and decreases the nominal interest rates. When the central bank sells bonds the public buyers pay with money from their checking accounts. The money supply decreases and the nominal interest rate rises.

Note: You could see questions on your exams asking about open market policies or open market actions. These questions are about buying or selling bonds. These questions are not asking about discount rates or reserve requirements.

The reserve requirement (or required reserve ratio) is the percentage of demand deposits (or checkable deposits) which cannot be loaned out. If the reserve requirement is 10% and a customer makes a $1000 deposit, the bank may loan out $900 of excess reserves while keeping $100 of required reserves on hand. Decreasing the reserve requirement increases the loans banks can make. New loans increase the money supply and decrease the nominal interest rate in the money market. Increasing the reserve requirement decreases the money supply and increases the nominal interest rate.

The discount rate is the interest rate banks are charged when they borrow money from the central bank. If banks do not have enough money to cover the required reserves, they may borrow money from the central bank and pay the discount rate for the short-term (overnight) loan. Increasing the discount rate makes it more expensive for banks when they don’t have enough to cover their required reserves. That causes banks to loan less money, which decreases the money supply. Decreasing the discount rate makes it less expensive for banks when they don’t have enough funds to meet their required reserves. That causes banks to loan more, which increases the money supply. 

All 3 of the above tools are used to target the interest rate banks charge each other for overnight loans. That interbank rate impacts all other interest rates in the economy. This rate is called the policy rate and is known as the Federal Funds Rate in the United States (but the US Federal Reserve uses the ample reserves framework).

Contractionary Monetary policy  is used to fight inflation. In a scarce reserves system a central bank can sell bonds on the open market, increase the discount rate, and/or increase the reserve requirement. Any of those actions will decrease the money supply and increase the nominal interest rate.

Expansionary Monetary Policy  is used to fight unemployment. In a scarce reserves system and central bank can buy bonds on the open market, decrease the discount rate, and/or decrease the reserve requirement. Any of those actions will increase the money supply and decrease the nominal interest rate. 

4.What is the reserves market graph?

The reserves market is the model used by central banks with an ample reserves system (as opposed to the money market above used in the scarce reserves system). It shows how changes in Interest On Reserves can be used to target specific policy rates (again, the Federal Funds rate is the name of the US policy rate in the US).

The Demand for Reserves is a downward sloping curve with a flat upper end and flat lower end. The upper end is the horizontal section on the top of the demand for reserves. That upper end is at the discount rate. It is horizontal at the discount rate because banks will not demand (borrow) reserves at any interest rate higher than the discount rate. An increase in the discount rate lifts the upper end, and a decrease in the discount rate lowers the upper end.

There is a middle downward sloping section of the demand for reserves. There we see the inverse relationship between the policy rate and the quantity of reserves demanded. When the supply of reserves intersects the downwards loping section of the demand, the economy has a scarce reserves system.

The lower end of the demand for reserves is the horizontal section at the bottom of the curve. That lower end is at the Interest on Reserves Rate. When there are ample reserves, the interest on reserves acts as a floor. At high quantities of reserves, the policy rate moves towards the interest on reserves rate through a process called arbitrage (We’ve been told arbitrage is not on the AP Macro exam), that flattens and lifts the lower section of the demand for reserves, creating the lower end. Increasing the Interest on Reserves.

The Supply of Reserves  is the controlled by the actions and policies of the central bank. The supply of reserves is not responsive to the policy rate, so it is vertical at the equilibrium quantity of reserves. The central bank uses open market operations to shift the supply of reserves. Buying bonds, increases the supply and that action is used to keep the reserves market in ample reserves (where the supply intersects the demand on the lower end). Selling bonds will shift the supply to the left.

The Policy Rate (PR)  is found at the intersection of the supply and demand. When the supply intersects the demand at the lower end (when there are ample reserves), small changes in the supply do not change the policy rate. As a result, open market operations do not change the policy rate in ample reserves. The policy rate is targeted by changing the interest on reserves rate to increase or decrease the lower end. 

5. How does Monetary Policy work in an ample reserves system?

In an ample reserves system, central banks use the reserves market to influence nominal rates. The targeted rate for interbank lending is the policy rate (called the Federal Funds Rate in the United States).

Interest on Reserves  is the primary tool used by central banks with an ample reserves system. Interest on reserves is the interest rate paid by the central bank to banks for their reserves. Since central banks can earn this rate on their reserves, the lower end of the demand for reserves moves up with an increase in the interest on reserves rate and down with a decrease in the interest on reserves rate. Thse shifts of the lower end of the demand for reserves changes the policy rate (Federal Funds Rate in the US). 

Open Market Operations  is used to maintain an ample reserves system. If banks make more loans, the supply of reserves decreases. Open market purchases shift the supply of reserves to the right, which keeps the supply on the lower end of the demand.

Administered rates  include both the Interest on Reserves rate and the discount rate. Increasing administered rates shifts the upper and lower end of the demand curve upward. Decreasing administered rates shifts the upper and lower end of the demand curve downward. 

6. What is expansionary monetary policy?

It doesn’t matter if an economy has scarce or ample reserves, expansionary monetary policy decreases interest rates. Lower interest rates increase gross investment. That shifts aggregate demand to the right. Expansionary monetary policy can be used to fight unemployment. It results in greater real output (real GDP) and that means more employment and less unemployment. Expansionary policy also increases the price level.

Scarce Reserves Expansionary Policy (money market):

• Decrease Discount Rate
• Decrease Reserve Requirement

Ample Reserves Expansionary Policy (reserves market):

• Decrease interest on Reserves or Decrease Administered Rates

7. What is contractionary monetary policy?

Contractionary monetary policy, on the other hand, increases interest rates. Higher interest rates decrease gross investment. That shifts aggregate demand to the left. Contractionary monetary policy can be used to fight inflation. It results in a lower price level which eases inflationary pressures. Contractionary policy also decreases real output and increases unemployment.

Scarce Reserves Contractionary Policy (money market):

• Increase Discount Rate
• Increase Reserve Requirement
• Increase interest on Reserves or Increase Administered Rates

8. How does monetary policy impact the growth rate?

Since the interest rate directly impacts the quantity of investment and gross investment includes purchases of physical capital, interest rates can impact the growth rate of the economy. Higher interest rates tend to decrease investment and with it the growth rate. Lower interest rates tend to increase investment and the growth rate.

9. How does expansionary monetary policy impact the long run?

As mentioned above, expansionary monetary policy shifts the aggregate demand (AD) right; causing the price level and real output to increase in the short run. In the long run (as you learned in the section about the AS/AD model), wages and other input prices adjust to the price level. Since the rightward shift of the AD curve caused an increase in the price level, wages and other input prices will eventually increase to that level. When that happens, the higher input costs cause the short run aggregate supply (SRAS) to shift left. The long run result is only an increase in price levels with no increase in real output.

Up Next:  Review Games:  Money Multiplier ,  Fiscal Policy/Monetary Policy Sorting Content Review Page:   Money Market Graph  

Other recommended resource:  ACDC

**AP©, Advanced Placement Program©, and College Board© are registered trademarks of the College Board, which was not involved in the production of, and does not endorse, this material. IB is a registered trade mark of International Baccalaureate Organization which was also not involved in the production of and does not endorse this material.**

I would like to acknowledge the work of Dick Brunelle and Steven Reff from Reffonomics.com whose work inspired many of the review games on this site. I would also like to thank Francis McMann, James Chasey, and Steven Reff who taught me how to be an effective AP Economics teacher at AP summer institutes; as well as the countless high school teachers, and college professors from the AP readings, economics Facebook groups, and #econtwitter. 

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Inflation: Four Questions Requiring Further Research to Inform Monetary Policy

I appreciate the opportunity to present closing remarks at the Inflation: Drivers and Dynamics Conference. The views I present will be my own and not necessarily those of the Federal Reserve System or of my colleagues on the Federal Open Market Committee.

Let me start by thanking the organizers at the Federal Reserve Bank of Cleveland and the European Central Bank for putting together such a strong program and the ECB for its hospitality. It has been a very productive two days focused on frontier research on inflation. High inflation has been the major challenge facing many central banks over the past two years. Returning the economy to price stability in a sustainable and timely way has driven monetary policy decisions.

The U.S. Economy

In the U.S., since early last year, the Federal Reserve has been tightening the stance of monetary policy. We have raised the target range of the federal funds rate by 5-1/4 percentage points. We are also reducing the size of the Fed’s balance sheet by allowing assets to roll off in a systematic way according to the plan announced in May 2022, which also helps to firm the stance of monetary policy. The tightening of monetary policy has led to a broader tightening in financial conditions. Banks, which play an important part in monetary policy transmission, have been tightening their credit standards, making credit less available to businesses and households. In addition, Treasury yields, mortgage rates, and credit spreads have risen.

The monetary policy actions taken to date are helping to moderate demand in both product and labor markets and to alleviate some of the imbalances that have contributed to price pressures. Real output growth has slowed from its robust pace in 2021. Supply is also adjusting, with disruptions in supply chains having generally improved over time. In the labor market, some progress is being made in bringing demand and supply into better balance, but the job market is still strong. Job growth has slowed and job openings are down, but the unemployment rate is low, at 3.8 percent, and the vacancy-to-unemployment ratio is still above its level during the strong labor market conditions in 2019. Labor supply conditions are helping to rebalance the labor market; the labor market participation rate of workers between the ages of 25 and 54 is above what it was before the pandemic.

Progress continues to be made on inflation, with total PCE inflation down significantly from its peak. Underlying measures of inflation have also improved but less so. Despite high inflation rates, medium- and longer-term inflation expectations remain reasonably well-anchored in a range consistent with the Fed’s goal of 2 percent inflation. Although there has been some progress, inflation remains too high. The FOMC is committed to moving inflation down to 2 percent. The monetary policy questions are whether the current level of the federal funds rate is sufficiently restrictive and how long policy will need to remain restrictive to keep inflation moving down in a sustainable and timely way to our goal of 2 percent. Future policy decisions will be about managing the risks and the intertemporal costs of over-tightening vs. under-tightening monetary policy. This assessment will require close monitoring of economic, banking, and financial market developments and using all of that economic reconnaissance to determine whether the economy is evolving in line with the outlook or not. The outlook will need to be informed not only by the incoming data but also by our models of and understanding of inflation dynamics, which has been the topic of this conference.

Inflation Research

The period of high inflation has highlighted that there are many things we do understand about inflation. In particular, when demand is outpacing supply, in an environment of very accommodative fiscal and monetary policy – the conditions that characterized the economy in 2021 after the pandemic-induced shutdown – inflation will begin to rise and it will remain persistent until monetary policy is recalibrated to moderate demand. Nonetheless, making such assessments in real time is difficult, especially when supply conditions are not stable, and forecasting inflation remains challenging. Indeed, FOMC participants underestimated inflation for much of the high-inflation period. But policymakers are required to make decisions based on the available, albeit limited information.

Further research is needed on many facets of inflation and inflation dynamics. Since I am in a room full of researchers, I want to highlight some of the questions whose answers would help inform monetary policy decisions. I took the same route when I presented keynote remarks at this conference in 2014, and it turns out that several of the questions I asked are still relevant. 1 Don’t be too discouraged: Progress has been made in addressing them. But the period of high inflation and structural changes to the economy during the pandemic and its aftermath have presented new questions and different takes on old questions. Further research will be needed to answer these questions, furthering our understanding of inflation as an aid to monetary policymaking.

Research Questions

The first question I asked in 2014 remains relevant: How can we best estimate the underlying trend in inflation?

Monetary policymakers are charged with keeping inflation at its longer-run goal and monetary policy affects the economy with long and variable lags. Both factors mean that policymakers need to be able to forecast inflation over the medium and longer run. So they need a method to separate temporary changes from changes that are more persistent. When the economy reopened after the pandemic-induced shutdown, U.S. monetary policymakers attributed much of the increase in inflation to supply shocks that were expected to be transitory, with inflation expected to return to its low pre-pandemic trend. It took some time and repeated under-forecasts of inflation for policymakers to realize that the conditions for high inflation were in place and that aggressive policy action was required. Better understanding of the factors that affect the medium-run inflation trend and ways to separate temporary changes from changes that are more persistent would have helped to avoid the situation.

Separating temporary from more persistent factors is challenging to do in real time, not only because some of the inflation data get revised (including the PCE inflation measure that the Fed targets), but also because measured inflation reflects a combination of factors: idiosyncratic factors, broader but temporary macroeconomic factors, and more persistent movements that affect the underlying inflation trend. One approach to estimating the underlying trend is to remove items that are often the sources of temporary movements in inflation. The traditional core measures of inflation in the U.S. exclude the prices of food and energy because they are thought to be very volatile. Another approach recognizes that other components can show more volatility than food and energy and derives measures that exclude components with the most extreme movements each month. The median and trimmed-mean inflation rates are of this type. 2 Some papers have shown that these types of measures can help to identify the underlying trend and may outperform measures of core inflation in forecasting total (aka headline) inflation. 3

There are also statistical models that try to isolate the trend from the noise and identify the cyclical and acyclical components of core inflation, where the cyclical components are, by definition, those associated with labor market tightness. 4

The literature has not discerned a best way to isolate the inflation trend; so, in practice, to forecast inflation, policymakers tend to look at all the measures of inflation, data on the real side of the economy, anecdotal reports from community and business contacts, and various models. Many of the forecasting models being used are informed by theoretical models of inflation dynamics.

Which brings me to my second question : Can we reconcile the actual pricing behavior of firms with predictions from the New Keynesian model, the workhorse inflation model used by many central bank economists?

In recent years, a considerable amount of research has examined the real-world pricing behavior of firms and incorporated these facts into macroeconomic models. 5 In fact, several papers presented at the conference explicitly incorporate micro data into macro models. 6 I view this as a continuation of the desirable approach of ensuring that our macro models are based on sound micro foundations.

The availability of data on individual prices has made advances possible. New surveys are also being used to better understand firms’ pricing behavior. For example, a survey conducted by researchers from the Cleveland, Atlanta, and New York Feds found that firms’ prices are strongly influenced by their perceptions about demand for their products, a desire to maintain steady profit margins, and their labor costs. 7 The paper based on the survey, and included in the conference’s poster session, estimates that cost-price passthrough at firms was about 60 percent on average, but that there was considerable heterogeneity across the firms. Interestingly, although firms do tend to raise their prices when wages rise, other research from the Cleveland Fed indicates that consumers do not expect their wage growth to keep up with inflation. The researchers find that a 1 percentage point increase in inflation expectations causes expectations of income growth to rise by only two-tenths of a percentage point; in other words, respondents expect rising inflation to hurt their real income. This might help to explain why people dislike high inflation even when the labor market is strong. 8

Research such as this can help to close the gap between the macro models we use to inform our monetary policy decisions and the microeconomic data. In addition, research on actual pricing behavior can also inform the framework for setting monetary policy. For example, at first blush it might seem that having a higher inflation target, all else equal, gives monetary policymakers more room to move the nominal interest rate down before hitting the effective lower bound; they could then provide more stimulus to the economy, if needed. But Cleveland Fed research suggests that all else would not be equal. 9 In particular, a higher inflation target would not provide as much policy room as one might expect; raising the inflation target would be subject to the Lucas critique. With higher steady-state inflation, firms would change their price-setting behavior and adjust their prices more frequently. Because monetary policy’s ability to affect real activity depends on the degree of price stickiness, a higher inflation target would make monetary policy less effective because firms would be changing their prices more frequently. The research’s quantitative result suggests that to increase policy space by 2 percentage points, instead of increasing the inflation target from 2 percent to 4 percent, one would need to increase the target to 5 percent. If you add to this the costs of having to change posted prices more often, the higher level of relative price distortions because everything is not indexed, higher shoe-leather costs from searching for the lowest prices, and the higher inflation volatility associated with higher inflation, the benefits of setting a higher inflation target are not compelling.

The Fed’s inflation target is 2 percent, and we are committed to returning inflation to 2 percent in a sustainable and timely way. This explicit target was first established in the FOMC’s statement on longer-run goals and monetary policy strategy in January 2012, and it has been reaffirmed every year since then. The 2 percent target was taken as given when the FOMC undertook its review of the monetary policy framework in 2019. The revised statement on longer-run goals and monetary policy strategy, which reflects the outcome of the review, recognizes the importance of keeping inflation expectations well-anchored at levels consistent with 2 percent inflation. 10 And by “well-anchored” I mean longer-term inflation expectations that are insensitive to data.

One of the big lessons from the 1970s is that it is much more difficult and costly to bring inflation down once it has become embedded in the economy, that is, once businesses and households expect inflation to remain elevated and those expectations influence their savings and investment decisions and price-setting and wage-setting behavior. Indeed, inflation expectations have been a central factor in models of inflationary dynamics since the 1960s and 1970s. 11 The theory indicates that well-anchored longer-term inflation expectations can help to mitigate the pull of resource gaps on inflation, and therefore, the cyclical movements in interest rates that policymakers induce to maintain price stability need not be as large as when inflation expectations are not well-anchored.

Putting the theory into practice brings me to my third question : For the purposes of setting monetary policy, how should inflation expectations be measured and over what time horizon?

One difficulty in moving from theory to practice is that while the models talk about “inflation expectations,” these expectations are not directly observable. So policymakers look at a number of measures that differ by type of agent and time horizon. These include measures based on surveys of consumers, businesses, and professional forecasters; measures derived from financial markets; and composite indices that combine various measures. A clear signal is not always forthcoming because the inflation expectations of different groups of agents can behave differently from one another. Even within groups there can be variation, and the literature has not firmly established whose expectations are most important for inflation dynamics. 12

Households may find it challenging to answer questions about the economic concept of inflation. Recent Cleveland Fed research found that when consumers are asked about what they think inflation will be in the future for the various categories of consumer spending, their answers do not aggregate up using any plausible weighting scheme to what they expect overall inflation will be. 13 Aggregated inflation expectations over categories tend to be lower than expectations of overall inflation, and the bottom-up aggregated expectations explain a greater share of planned consumer spending. This inconsistency reinforces the approach taken by policymakers to look at various measures of inflation expectations.

Indeed, several new measures are increasing our understanding of inflation expectations. Researchers at the Cleveland Fed have developed a measure of inflation expectations that does not require the respondents to understand the economic concept of aggregate inflation. The Cleveland Fed’s indirect consumer inflation expectations (ICIE) measure, which started in 2021, is based on a nationwide survey with more than 10,000 responses and is updated on a weekly basis. Instead of asking consumers directly about overall inflation, the survey asks consumers how they expect the prices of the things they buy to change over the next 12 months and how much their incomes would have to change for them to be able to afford the same consumption basket and be equally well-off. 14 According to this measure, women’s inflation expectations have tended to run higher than those of men, and older respondents and more educated respondents also have reported higher inflation expectations than their counterparts.

Less information has been available on firms’ inflation expectations, even though firms are the price setters. But new data series are being developed. For example, the Cleveland Fed has begun publishing the Survey of Firms’ Inflation Expectations (SoFIE), a nationally representative, quarterly survey of CEOs and other top business executives, which was started by academics in 2018. 15 The survey data indicate that the year-ahead inflation expectations of these business executives rose as inflation increased in 2021 and 2022. Their expectations began to decline in 2023 but remain elevated at 4.3 percent as of July. Perhaps more troubling is that when respondents were asked in April what they thought the Fed’s inflation target was, the mean response was 3.1 percent. This is higher than our target of 2 percent and also nearly a percentage point above the mean response before the pandemic.

Monetary policymakers typically focus on medium- to longer-term inflation expectations because this is the time horizon over which monetary policy can be expected to affect the economy and is more reflective of consumers’ perceptions of the Fed’s commitment and ability to return the economy to price stability. Ample research shows that changes in the prices of particular salient items, including gasoline and food, which are independent of monetary policy, can have an outsized effect on households’ shorter-run inflation expectations. 16 However, recent research by Cleveland Fed economists indicates that policymakers should not ignore persistently elevated levels of shorter-term inflation expectations and focus only on longer-term expectations. The researchers find persistent differences in inflation expectations across consumers of different ages and that households form their expectations of inflation based on their lifetime experience of inflation. 17 When this mechanism is incorporated into a conventional New Keynesian model, inflation shocks are more persistent than otherwise, and the optimal response is for monetary policy to tighten when short-run inflation expectations rise even if longer-run expectations are stable. Doing so helps to limit the experience households have with high inflation, which helps to keep inflation expectations anchored in the future.

Better understanding of how households and firms form their inflation expectations will help inform how monetary policymakers should respond when inflation deviates from the target. This brings me to my fourth and final question : How should monetary policymakers respond to supply shocks?

The current episode of high inflation has been a challenging one. In the U.S., inflation began rising in the spring of 2021. A sequence of supply shocks, driven first by the pandemic and then the war in Ukraine contributed to the high inflation. These supply shocks were concentrated in the goods sector, which was already seeing a surge in demand as consumers shifted spending from services to goods during the pandemic-induced shutdown and when they continued to take social distancing measures once the economy reopened. The supply shocks exacerbated the imbalances between demand and supply, which, in an environment of very accommodative fiscal and monetary policy, led to a significant and persistent increase in inflation.

The episode has called into question the conventional view that monetary policy should always look through supply shocks. The thinking is that supply shocks tend to be transitory, and while they raise the price level for a time, they do not lead to a persistent increase in inflation or inflation expectations. Moreover, since monetary policy acts with a lag, if policymakers were to react to a transitory supply shock, it would be counterproductive, affecting the economy after the supply shock had dissipated. But to the extent that supply shocks are more persistent or there is a sequence of supply shocks, this thinking need not apply because such shocks can threaten the stability of inflation expectations and this would require policy action. Indeed, when inflation expectations are not firmly anchored, if monetary policy fails to react in an appropriate way, what starts out as a potentially temporary shock could lead to more persistent effects on inflation. 18

This brings up the possibility that monetary policy may want to react differently depending on the nature of the shock that has led to a rise in inflation, with the reaction dependent on the size and persistence of the shock, because different shocks have different implications for inflation expectations. An interesting paper presented at the conference suggests that in an environment where prices are more flexible than wages and agents have bounded rationality rather than fully rational expectations with respect to inflation, policy may want to respond more aggressively to supply shocks when inflation is already high and less aggressively when inflation is low. 19 This can lead policymakers to first look through supply shocks and then respond more aggressively as inflation moves up, which arguably characterizes the current high-inflation episode. However, other interesting research shows that optimal monetary policy responses depend critically on how inflation expectations are formed and how well they are anchored. In one model, when expectations differ from rational expectations and are not well-anchored, policymakers are better off responding earlier to signs that inflation is rising rather than delaying and only then responding aggressively. 20 The implication is that when there is uncertainty, policymakers should overestimate the degree of persistence of inflation shocks rather than underestimate it.

More research on the timing and magnitude of the optimal monetary policy response in the face of different types of shocks and when inflation expectations deviate from rational expectations would be helpful to policymakers.

To conclude, let me again thank the organizers at the European Central Bank and at the Cleveland Fed for putting together such a strong conference program. When we started the Cleveland Fed’s Center for Inflation Research in December 2018, some people raised an eyebrow. They questioned the center’s focus because inflation had been so benign for quite some time. It turned out to be precisely the right time to further the research agenda on inflation. Maintaining price stability is the responsibility of the central bank and only the central bank can deliver on this goal over time. While considerable progress has been made on developing inflation models and measures that can better inform monetary policymaking, we still have much to learn about inflation dynamics. I encourage the researchers participating in this conference to continue furthering their research agendas because good policymaking depends on the research that informs it.

• See Mester (2014). Return to 1
• The Federal Reserve Bank of Cleveland produces the median and trimmed-mean CPI inflation rate and the median PCE inflation rate. The Federal Reserve Bank of Dallas produces the trimmed-mean PCE inflation rate. The Federal Reserve Bank of Cleveland’s Center for Inflation Research produces inflation measures and analyses of inflation and inflation expectations to inform policymakers, researchers, and the general public ( https://www.clevelandfed.org/center-for-inflation-research ). Return to 2
• See Bryan and Pike (1991), Bryan and Cecchetti (1993), and Bryan, Cecchetti, and Wiggins (1997) for CPI, and Meyer, Venkatu, and Zaman (2013), Meyer and Zaman (2019), and Smith (2004) for PCE. An exception is Crone, et al. (2013), who find that headline PCE inflation can beat the core measure in predicting future PCE inflation. Return to 3
• See Stock and Watson (2020) and Zaman (2019). Return to 4
• Klenow and Malin (2010) review the literature. Return to 5
• These papers include Adam, Alexandrov, and Weber (2023), Gagliardone et al. (2023), Lan, Li, and Li (2023), and Sara-Zaror (2021). Return to 6
• See Dogra, et al. (2023). Return to 7
• See Hajdini, et al. (2023). Return to 8
• See L’Huillier and Schoenle (2023). Return to 9
• The FOMC’s statement on longer-run goals and monetary policy strategy, revised in 2020 and reaffirmed since then, says that the Committee judges that longer-term inflation expectations that are well-anchored at 2 percent contribute to achieving its monetary policy goals. See Federal Open Market Committee (2023). Return to 10
• See Phelps (1967), Friedman (1968), and Lucas (1972). For further discussion see Mester (2022a,b). Return to 11
• Candia, Coibion, and Gorodnichenko (2021) find that the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Return to 12
• See Dietrich, et al. (2022). Return to 13
• The ICIE series is available on the Central Bank Research Association (CEBRA) website at https://cebra.org/indirect-consumer-inflation-expectations/ . For background on the survey and results using the survey, see Hajdini, et al. (2022a,b). Return to 14
• The Survey of Firms’ Inflation Expectations (SoFIE) was created by Professors Olivier Coibion and Yuriy Gorodnichenko; it is maintained by the Federal Reserve Bank of Cleveland at https://www.clevelandfed.org/indicators-and-data/survey-of-firms-inflation-expectations . For background on the survey, see Garciga et al. (2023). Return to 15
• For the effect of salient prices on inflation expectations, see Coibion and Gorodnichenko (2015), Cavallo, Cruces, and Perez-Truglia (2017), D’Acunto, et al. (2021), and Campos, McMain, and Pedemonte (2022). Return to 16
• See Pedemonte, Toma, and Verdugo (2023). Return to 17
• Reis (2021) and Walsh (2022) discuss the importance of anchored inflation expectations, drawing on the experience of the U.S. during the 1960s and 1970s. Return to 18
• See Beaudry, Carter, and Lahiri (2022). Return to 19
• See Walsh (2022). Return to 20
• Adam, Klaus, Andrey Alexandrov, and Henning Weber, “Inflation Distorts Relative Prices: Theory and Evidence,” CEPR Discussion Paper DP18088, April 18, 2023. ( https://cepr.org/publications/dp18088 )
• Beaudry, Paul, Thomas J. Carter, and Amartya Lahiri, “Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma,” Bank of Canada Staff Working Paper 2022-41, October 13, 2022. ( https://www.bankofcanada.ca/2022/09/staff-working-paper-2022-41/ )
• Bryan, Michael F., and Christopher J. Pike, “Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation,” Federal Reserve Bank of Cleveland, Economic Commentary, December 1, 1991. ( https://doi.org/10.26509/frbc-ec-19911201 )
• Bryan, Michael F., and Stephen G. Cecchetti, “Measuring Core Inflation.” Federal Reserve Bank of Cleveland, Working Paper No. 93-04, June 1993. ( https://doi.org/10.26509/frbc-wp-199304 )
• Bryan, Michael F., Stephen G. Cecchetti, and Rodney L. Wiggins II, “Efficient Inflation Estimation,” Federal Reserve Bank of Cleveland, Working Paper No. 97-07, August 1997. ( https://doi.org/10.26509/frbc-wp-199707 )
• Campos, Chris, Michael McMain, and Mathieu Pedemonte, “Understanding Which Prices Affect Inflation Expectations,” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2022-06, April 19, 2022. ( https://doi.org/10.26509/frbc-ec-202206 )
• Candia, Bernardo, Olivier Coibion, and Yuriy Gorodnichenko, “The Inflation Expectations of U.S. Firms: Evidence from a New Survey,” National Bureau of Economic Research Working Paper 28836, May 2021. ( http://www.nber.org/papers/w28836 )
• Cavallo, Alberto, Guillermo Cruces, and Ricardo Perez-Truglia, “Inflation Expectations, Learning, and Supermarket Prices: Evidence from Survey Experiments,” American Economic Journal: Macroeconomics 9, 2017, pp. 1-35. ( https://www.aeaweb.org/articles?id=10.1257/mac.20150147 )
• Coibion, Olivier, and Yuriy Gorodnichenko, “Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation,” American Economic Journal: Macroeconomics 7, 2015, pp. 197-232. ( http://dx.doi.org/10.1257/mac.20130306 )
• Crone, Theodore M., N. Neil K. Khettry, Loretta J. Mester, and Jason A. Novak, “Core Measures of Inflation as Predictors of Total Inflation,” Journal of Money, Credit and Banking 45 (March-April 2013), pp. 505-519. ( https://doi.org/10.1111/jmcb.12013 )
• D’Acunto, Francesco, Ulrike Malmendier, Juan Ospina, and Michael Weber, “Exposure to Grocery Prices and Inflation Expectations,” Journal of Political Economy 129, 2021, pp 1615-1639. ( https://doi.org/10.1086/713192 )
• Dietrich, Alexander M., Edward S. Knotek II, Kristian Ove R. Myrseth, Robert W. Rich, Raphael S. Schoenle, and Michael Weber. “Greater Than the Sum of the Parts: Aggregate vs. Aggregated Inflation Expectations,” Federal Reserve Bank of Cleveland, Working Paper No. 22-20, June 2022. ( https://doi.org/10.26509/frbc-wp-202220 )
• Dogra, Keshav, Sebastian Heise, Edward S. Knotek II, Brent Meyer, Robert W. Rich, Raphael S. Schoenle, Giorgio Topa, Wilbert van der Klaauw, and Wändi Bruine de Bruin, “Estimates of Cost-Price Passthrough from Business Survey Data.” Federal Reserve Bank of Cleveland, Working Paper No. 23-14, June 2023. ( https://doi.org/10.26509/frbc-wp-202314 )
• Federal Open Market Committee, “Statement on Longer-Run Goals and Monetary Policy Strategy,” reaffirmed effective January 31, 2023. ( https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf )
• Federal Reserve Bank of Cleveland’s Center for Inflation Research. ( https://www.clevelandfed.org/center-for-inflation-research )
• Friedman, Milton, “The Role of Monetary Policy,” American Economic Review 58, 1968, pp. 1-17. ( https://www.jstor.org/stable/1831652 )
• Gagliardone, Luca, Mark Gertler, Simone Lenzu, and Joris Tielens, “Anatomy of the Phillips Curve: Micro Evidence and Macro Implications,” National Bureau of Economic Research, Working Paper 31382, June 2023. ( https://doi.org/10.3386/w31382 )
• Garciga, Christian, Edward S. Knotek II, Mathieu Pedemonte, and Taylor Shiroff, “The Survey of Firms’ Inflation Expectations.” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2023-10, May 22, 2023. ( https://doi.org/10.26509/frbc-ec-202310 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Indirect Consumer Inflation Expectations,” Economic Commentary, Federal Reserve Bank of Cleveland, Number 2022-03, March 1, 2022a. ( https://doi.org/10.26509/frbc-ec-202203 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Indirect Consumer Inflation Expectations: Theory and Evidence,” Federal Reserve Bank of Cleveland, Working Paper No. 22-35, November 2022b. ( https://doi.org/10.26509/frbc-wp-202235 )
• Hajdini, Ina, Edward S. Knotek II, John Leer, Mathieu Pedemonte, Robert W. Rich, and Raphael S. Schoenle, “Low Passthrough from Inflation Expectations to Income Growth Expectations: Why People Dislike Inflation,” Federal Reserve Bank of Cleveland Working Paper No. 22-21R, March 2023. ( https://doi.org/10.26509/frbc-wp-202221r )
• Indirect Consumer Inflation Expectations (ICIE), Central Bank Research Association (CEBRA). ( https://cebra.org/indirect-consumer-inflation-expectations/ )
• Klenow, Peter J., and Benjamin A. Malin, “Chapter 6 – Microeconomic Evidence on Price-Setting,” in Handbook of Monetary Economics, vol. 3, ed. Benjamin M. Friedman and Michael Woodford, Amsterdam: North Holland, 2010, pp. 231-284. ( https://doi.org/10.1016/B978-0-444-53238-1.00006-5 )
• Lan, Ting, Lerong Li, and Minghao Li. 2023. “Matching Price Stickiness and MPC: Monetary Policy Implications,” manuscript, 2023.
• L’Huillier, Jean-Paul, and Raphael Schoenle, “Raising the Inflation Target: What Are the Effective Gains in Policy Room?” manuscript (revision of Federal Reserve Bank of Cleveland, Working Paper No. 20-16), May 18, 2023. ( https://people.brandeis.edu/~schoenle/research/raising_the_target.pdf )
• Lucas, Robert E., Jr., “Expectations and the Neutrality of Money,” Journal of Economic Theory 4, 1972, pp. 103-124. ( https://doi.org/10.1016/0022-0531(72)90142-1 )
• Mester, Loretta J., “Inflation and Monetary Policy: Six Research Questions,” keynote remarks, Federal Reserve Bank of Cleveland Conference on Inflation, Monetary Policy, and the Public, Cleveland, OH, May 30, 2014. ( https://www.clevelandfed.org/en/collections/speeches/2014/sp-20140530-inflation-and-monetary-policy-six-research-questions )
• Mester, Loretta J., “The Role of Inflation Expectations in Monetary Policymaking: A Practitioner’s Perspective,” European Central Bank Forum on Central Banking: Challenges for Monetary Policy in a Rapidly Changing World, Sintra, Portugal, June 29, 2022a. ( https://www.clevelandfed.org/en/collections/speeches/2022/sp-20220629-the-role-of-inflation-expectations-in-monetary-policymaking )
• Mester, Loretta J., “Inflation, Inflation Expectations, and Monetary Policymaking Strategy,” Distinguished Speaker Series, Massachusetts Institute of Technology, Golub Center for Finance and Policy, Cambridge, MA, September 26, 2022b. ( https://www.clevelandfed.org/en/collections/speeches/2022/sp-20220926-inflation-inflation-expectations-and-monetary-policymaking-strategy )
• Meyer, Brent, Guhan Venkatu, and Saeed Zaman, “Forecasting Inflation? Target the Middle,” Federal Reserve Bank of Cleveland, Economic Commentary Number 2013-05, April 11, 2013. ( https://doi.org/10.26509/frbc-ec-201305 )
• Meyer, Brent, and Saeed Zaman, “The Usefulness of the Median CPI in Bayesian VARs Used for Macroeconomic Forecasting and Policy.” Empirical Economics 57, 2019, pp. 603-630. ( https://doi.org/10.1007/s00181-018-1472-1 )
• Pedemonte, Mathieu, Hiroshi Toma, and Esteban Verdugo, “Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience,” Working Paper No. 23-04, Federal Reserve Bank of Cleveland, January 2023. ( https://doi.org/10.26509/frbc-wp-202304 )
• Phelps, Edmund S., “Phillips Curves, Expectations of Inflation, and Optimal Unemployment Over Time,” Economica 34, 1967, pp. 254-281. ( https://doi.org/10.2307/2552025 )
• Reis, Ricardo, “Losing the Inflation Anchor,” Brookings Papers on Economic Activity, Fall 2021, pp. 307-361. (Brookings conference draft available at: https://www.brookings.edu/wp-content/uploads/2021/09/Losing-the-Inflation-Anchor_Conf-Draft.pdf )
• Sara-Zaror, Francisca, “Expected Inflation and Welfare: The Role of Consumer Search,” manuscript, November 14, 2021. ( http://dx.doi.org/10.2139/ssrn.4127502 )
• Smith, Julie K., “Weighted Median Inflation: Is This Core Inflation?” Journal of Money, Credit and Banking 36, April 2004, pp. 253-263. ( https://www.jstor.org/stable/3839019 )
• Stock, James H., and Mark W. Watson, “Slack and Cyclically Sensitive Inflation,” Journal of Money, Credit and Banking 52(S2), December 2020, pp. 393-428. ( https://doi.org/10.1111/jmcb.12757 )
• Survey of Firms’ Inflation Expectations (SoFIE), Federal Reserve Bank of Cleveland. ( https://www.clevelandfed.org/indicators-and-data/survey-of-firms-inflation-expectations )
• Walsh, Carl E., “Inflation Surges and Monetary Policy,” Monetary and Economic Studies 40, Bank of Japan, November 2022, pp. 39-66. ( https://www.imes.boj.or.jp/research/papers/english/me40-4.pdf )
• Zaman, Saeed, “Cyclical versus Acyclical Inflation: A Deeper Dive,” Federal Reserve Bank of Cleveland, Economic Commentary, Number 2019-13, September 4, 2019. ( https://doi.org/10.26509/frbc-ec-201913 )

Suggested Citation

Mester, Loretta J. 2023. “Inflation: Four Questions Requiring Further Research to Inform Monetary Policy.” Speech, Closing Remarks, Inflation: Drivers and Dynamics Conference 2023-Federal Reserve Bank of Cleveland’s Center for Inflation Research and the European Central Bank-Frankfurt am Main, Germany.

Read our research on: Gun Policy | International Conflict | Election 2024

Regions & Countries

What public k-12 teachers want americans to know about teaching.

Illustrations by Hokyoung Kim

At a time when most teachers are feeling stressed and overwhelmed in their jobs, we asked 2,531 public K-12 teachers this open-ended question:

If there’s one thing you’d want the public to know about teachers, what would it be?

We also asked Americans what they think about teachers to compare with teachers’ perceptions of how the public views them.

Related: What’s It Like To Be a Teacher in America Today?

Pew Research Center conducted this analysis to better understand what public K-12 teachers would like Americans to know about their profession. We also wanted to learn how the public thinks about teachers.

For the open-end question, we surveyed 2,531 U.S. public K-12 teachers from Oct. 17 to Nov. 14, 2023. The teachers surveyed are members of RAND’s American Teacher Panel, a nationally representative panel of public K-12 school teachers recruited through MDR Education. Survey data is weighted to state and national teacher characteristics to account for differences in sampling and response to ensure they are representative of the target population.

Overall, 96% of surveyed teachers provided an answer to the open-ended question. Center researchers developed a coding scheme categorizing the responses, coded all responses, and then grouped them into the six themes explored in the data essay.

For the questions for the general public, we surveyed 5,029 U.S. adults from Nov. 9 to Nov. 16, 2023. The adults surveyed are members of the Ipsos KnowledgePanel, a nationally representative online survey panel. Panel members are randomly recruited through probability-based sampling, and households are provided with access to the Internet and hardware if needed. To ensure that the results of this survey reflect a balanced cross section of the nation, the data is weighted to match the U.S. adult population by gender, age, education, race and ethnicity and other categories.

Here are the questions used for this analysis , along with responses, the teacher survey methodology and the general public survey methodology .

Most of the responses to the open-ended question fell into one of these six themes:

Teaching is a hard job

About half of teachers (51%) said they want the public to know that teaching is a difficult job and that teachers are hardworking. Within this share, many mentioned that they have roles and responsibilities in the classroom besides teaching, which makes the job stressful. Many also talked about working long hours, beyond those they’re contracted for.

“Teachers serve multiple roles other than being responsible for teaching curriculum. We are counselors, behavioral specialists and parents for students who need us to fill those roles. We sacrifice a lot to give all of ourselves to the role as teacher.”

– Elementary school teacher

“The amount of extra hours that teachers have to put in beyond the contractual time is ridiculous. Arriving 30 minutes before and leaving an hour after is just the tip of the iceberg. … And as far as ‘having summers off,’ most of August is taken up with preparing materials for the upcoming school year or attending three, four, seven days’ worth of unpaid development training.”

– High school teacher

Teachers care about their students

The next most common theme: 22% of teachers brought up how fulfilling teaching is and how much teachers care about their students. Many gave examples of the hardships of teaching but reaffirmed that they do their job because they love the kids and helping them succeed. 

“We are passionate about what we do. Every child we teach is important to us and we look out for them like they are our own.”

– Middle school teacher

“We are in it for the kids, and the most incredible moments are when children make connections with learning.”

Teachers are undervalued and disrespected

Some 17% of teachers want the public to know that they feel undervalued and disrespected, and that they need more public support. Some mentioned that they are well-educated professionals but are not treated as such. And many teachers in this category responded with a general plea for support from the public, which they don’t feel they’re getting now.

“We feel undervalued. The public and many parents of my students treat me and my peers as if we do not know as much as they do, as if we are uneducated.”

“The public attitudes toward teachers have been degrading, and it is making it impossible for well-qualified teachers to be found. People are simply not wanting to go into the profession because of public sentiments.”

Teachers are underpaid

A similar share of teachers (15%) want the public to know that teachers are underpaid. Many teachers said their salary doesn’t account for the effort and care they put into their students’ education and believe that their pay should reflect this.

“We are sorely underpaid for the amount of hours we work and the education level we have attained.”

Teachers need support and resources from government and administrators

About one-in-ten teachers (9%) said they need more support from the government, their administrators and other key stakeholders. Many mentioned working in understaffed schools, not having enough funding and paying for supplies out of pocket. Some teachers also expressed that they have little control over the curriculum that they teach.

“The world-class education we used to be proud of does not exist because of all the red tape we are constantly navigating. If you want to see real change in the classroom, advocate for smaller class sizes for your child, push your district to cap class sizes at a reasonable level and have real, authentic conversations with your child’s teacher about what is going on in the classroom if you’re curious.”

Teachers need more support from parents

Roughly the same share of teachers (8%) want the public to know that teachers need more support from parents, emphasizing that the parent-teacher relationship is strained. Many view parents as partners in their child’s education and believe that a strong relationship improves kids’ overall social and emotional development.

“Teachers help students to reach their potential. However, that job is near impossible if parents/guardians do not take an active part in their student’s education.”

How the U.S. public views teachers

While the top response from teachers in the open-ended question is that they want the public to know that teaching is a hard job, most Americans already see it that way. Two-thirds of U.S. adults say being a public K-12 teacher is harder than most other jobs, with 33% saying it’s a lot harder.

And about three-quarters of Americans (74%) say teachers should be paid more than they are now, including 39% who say teachers should be paid a lot more.

Americans are about evenly divided on whether the public generally looks up to (32%) or down on (30%) public K-12 teachers. Some 37% say Americans neither look up to or down on public K-12 teachers.

In addition to the open-ended question about what they want the public to know about them, we asked teachers how much they think most Americans trust public K-12 teachers to do their job well. We also asked the public how much they trust teachers. Answers differ considerably.

Nearly half of public K-12 teachers (47%) say most Americans don’t trust teachers much or at all. A third say most Americans trust teachers some, and 18% say the public trusts teachers a great deal or a fair amount.

In contrast, a majority of Americans (57%) say they do trust public K-12 teachers to do their job well a great deal or a fair amount. About a quarter (26%) say they trust teachers some, and 17% say they don’t trust teachers much or at all.

Related: About half of Americans say public K-12 education is going in the wrong direction

How the public’s views differ by party

There are sizable party differences in Americans’ views of teachers. In particular, Democrats and Democratic-leaning independents are more likely than Republicans and Republican leaners to say:

• They trust teachers to do their job well a great deal or a fair amount (70% vs. 44%)
• Teaching is a lot or somewhat harder when compared with most other jobs (77% vs. 59%)
• Teachers should be paid a lot or somewhat more than they are now (86% vs. 63%)

In their own words

Below, we have a selection of quotes that describe what teachers want the public to know about them and their profession.

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About Pew Research Center Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions. It is a subsidiary of The Pew Charitable Trusts .

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