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Answer :
The Fed should target the price level or expected changes in the price level if its primary goal is price stability, with a specific focus on a set inflation rate such as 2%.
If the Federal Reserve's (the Fed) primary goal is price stability, the macroeconomic variable it should target is the price level or expected changes in the price level. The Fed could aim for a specific inflation rate, for example, 2%, and adjust its monetary policy to maintain or achieve this target rate. However, this policy approach is not without challenges, as factors like rising oil prices can cause inflation to increase temporarily, possibly leading to decisions that could worsen a recessionary gap. The Fed's goal of price stability sometimes conflicts with other objectives such as output stability, making the task of setting targets and implementing policy more complex.
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