If the Fed wanted to keep inflation in check given the growth rate of the economy, how should they have responded to the financial innovations of the mid to late 1970s and early 1980s in terms of money growth?
What will be an ideal response?
The financial innovations of the late 1970s and early 1980s that impacted the Fed's strategies were the introduction of stock and money market mutual funds that provided investors with better returns than traditional demand deposit accounts and the opportunity to draft from these accounts. As a result billions of dollars were moved from traditional demand deposit accounts into these mutual funds. This increased the velocity of money which has the same impact on the price level (given the growth of real output) as an increase in the money supply. If the Fed didn't want this increase in the price level they should have reduced the percentage growth rate of money by the percentage increase in velocity.
You might also like to view...
If demand for a good is price elastic, it must also be income elastic
a. True b. False Indicate whether the statement is true or false
A firm that controls both the upstream as well as the downstream stages of production is said to be:
a. functionally integrated. b. perpendicularly integrated. c. vertically integrated. d. horizontally integrated.
The circular flow model is an abstract representation of the interaction between households and firms through the institutions of
a. government and financing outlets b. church and state c. property and law d. resource and product markets e. trade and conflict
In the early 1900s, which of the following was not true?
A. Government intervention was commonly used to stimulate the economy. B. Falling price levels appeared to limit an increase in unemployment. C. Periods of high unemployment tended to be brief. D. Say's Law seemed to work.