First, discuss why central banks are primarily concerned with achieving ‘price stability’ as the main goal of monetary policy, rather than other objectives such as reducing unemployment. Then, consider an economy where the Central Bank is pursuing a 2% inflation target. If this economy faces a recession due to sluggish investment and weak demand, how should the Central Bank respond? Would policy makers be concerned if expectations of inflation fell below the inflation target? Explain why.

Week 1 2 3 5 Dow Indicator 1 1234SGRA 6 7 2 5691FWNGSAW 7 2 7 2 4567WNLast WI 3 1 2 Exhibit 1 Historical Demand and Bookings Data Tuesday Bookings Demand 1,470 870 986 1,247 1,109 1,197 1,500 1,854 1,489 1,792 1,708 1,787 1,314 1,136 1,537 1,132 1,368 1,488 1,392 1,321 1,469 1,795 1,780 1,841 1,774 1,835 1,847 1,833 1,847 1,680 -4- 1,680 1,798 1,843 1,322 1,022 1,512 864 827 952 740 908 1,311 2,034 1,584 1,682 1,684 1,600 1,077 956 1,455 1,001 1,131 1,151 942 884 1,315 1,885 1,963 2,006 1,855 1,962 2,019 2,052 2,018 1,706 1,874 1,827 1,734 1,124 803 Pickup Ratio 0.972 1.007 1.192 1.310 1.499 1.318 1.144 0.912 0.940 1.065 1.014 1.117 1.220 1.188 1.056 1.131 1.210 1.293 1.478 1.494 1.117 0.952 0.907 0.918 0.956 0.935 0.915 0.893 0.915 0.985 0.896 0.984 1.063 1.176 1.273 UV0353 Dow Index 0.865 0.911 0.973 1.013 1.068 1.123 1.049 0.865 0.911 0.973 1.013 1.068 1.123 1.049 0.865 0.911 0.973 1.013 1.068 1.123 1.049 0.865 0.911 0.973 1.013 1.068 1.123 1.049 0.865 0.911 0.973 1.013 1.068 1.123 1.049