Unit 4 · Level 1 · Central banks
The mandate
The ECB's core mandate is price stability: inflation around 2% over the medium term. The US Fed carries a dual mandate: stable prices AND maximum employment. Everything central banks do, from rate decisions to cryptic speeches, traces back to these few words.
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What you get asked
The ECB's primary mandate is…
Price stability first; other goals only insofar as they don't conflict. Propping up stock markets is nowhere in the treaty.
Why target 2% inflation instead of a clean 0%?
At 0% you're one shock from deflation: falling prices make people delay spending and debts grow heavier. A 2% cushion also leaves rates room to be cut in a crisis.
The US Fed has a dual mandate: stable prices and maximum ___.
Congress gave the Fed two jobs. When inflation and jobs pull in opposite directions (like 2022), the Fed must pick its poison.
Match the institution or idea to its description.
Japan's decades-long fight with deflation is the cautionary tale behind everyone's 2% buffer.
Why are central banks kept independent from elected politicians?
Cheap money feels great before an election and hurts after it. History shows countries with independent central banks keep inflation lower. The temptation is real. 🐜
The rest of this unit
The people who set the price of money: their mandate, their tools, and their words.