Publications

We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy- makers. We combine an ination target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate the appropriate response by the policy maker to each of a positive shock to demand, a negative supply shock and dislodged ination expectations. We also illustrate the problems of a zero bound for policy rates within this framework and consider the role of an interest rate rule in o⁄setting money market perturbations. Some key readings are introduced.