European Central Bank and Eurozone.

Part 1: What are the current domestic conditions you think are relevant for deciding what to do with the monetary policy instrument?

Part 2: What are the current external (foreign) conditions you think are relevant for deciding what to do to with the monetary policy instrument?

Part 3: What is the likely impact of these conditions on the AD curve? * Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw only one shift or no change.

Part 4: What is the likely impact of these conditions on the AS curve? * Note: to decide this, you need to take all relevant factors in parts 2 and 3 into account and draw only one shift or no change.

Part 5: Based on the above, what do you think your country's central bank should do, why?

Two Stages of developing: There should be two main stages involved in developing your proposal:

Stage 1: Think about the current economic data and recent trends that central bank members would use in making a policy recommendation. The data you consider should include leading economic indicators. At the most basic level, these would include unemployment and inflation rates and the consumer confidence index. Better proposals would also include other indicators of the strength of aggregate demand (such as housing and construction activity, retail sales, exports and imports, strength of foreign economies) and of aggregate supply (such as energy costs and productivity trends). In examining the data, you should think about what it means by itself and also how it fits in with other data to predict movements in aggregate demand and/or aggregate supply. If, for example, consumer confidence has decreased, you would consider this as a piece of evidence which, alongside other trends you identify, would allow central bank members to predict what might happen to aggregate demand in the future. Keep in mind that this exercise involves the uncertainty of the real world. For example, if retail sales have been unusually low but domestic investment is growing, then you need to decide what these (opposing) events might mean for future aggregate demand. Keep in mind that there is not necessarily one right answer. In order to make your recommendation, you should think about whether there are more factors that indicate a shift of the AD (or AS) curve in a particular direction or whether there are some factors that have changed more significantly than other factors.

Stage 2: Think more closely about how the data you have collected impacts the theoretical models we have talked about this semester (e.g. AD-AS and the IS-LM models). Then use these models to suggest what the central bank ought to do to monetary policy at the next meeting. For example, if you think that the AD and AS curves might move so that output falls below potential, then you might think that the central bank should lower the interest rate with the aim of boosting investment and consumption spending and therefore output.

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