Explain the dilemma that supply shocks pose when the Fed chooses to use monetary policy to achieve its goals
What will be an ideal response?
A negative supply shock causes the Phillips curve to shift up as the inflation rate increases for every value of the output gap. If the Fed keeps the real interest rate unchanged, the inflation rate will rise, undermining the Fed's goal of price stability. The Fed could attempt to maintain the inflation rate at its initial level by raising the real interest rate, but the higher interest rate would result in declines in consumption, investment, and net exports, decreasing real GDP below potential GDP, and so fails to meet its goal of high employment. Therefore, supply shocks require the Fed to choose between its goals of price stability and high employment.
You might also like to view...
In order to have ________ distribution of final products to households, free and open markets are essential.
A. a fair B. an equitable C. an efficient D. All of the above are correct.
A nation has a population of 300 million people. Of these, 80 million are retired, in the military, in institutions, or under 16 years old. There are 210 million who are employed and 10 million who are unemployed. What is the unemployment rate?
a. 3.6 percent b. 3.3 percent c. 4.5 percent d. 5.2 percent
One of the main difficulties with implementing fiscal policy is:
A. deciding on a policy without all the relevant information. B. the time lag between the time the policy is chosen and the time it gets enacted. C. the danger in overshooting or undershooting the goal of full employment. D. All of these are true.
In a market economy, the incomes of consumers depend primarily upon:
A. Government policies in setting wages and interest rates B. The quantity and prices of resources that they possess C. The amount of savings that they have accumulated D. How closely connected they are to government and business leaders