Q3. What are the two parts of the Fe... [FREE SOLUTION]

Chapter 16: Q3. (page 347)

What are the two parts of the Fed鈥檚 dual mandate? How does the dual mandate relate to the bullseye chart? Which quadrants of the bullseye chart give conflicting signals to the Fed, and what is the source of the confusion in each case?

Short Answer

Expert verified

The dual mandate of the Fed includes full employment and stable prices. A bullseye chart helps the Fed achieve its dual mandate. The southwest and northwest quadrants of the bullseye chart give conflicting signals to the Fed as it takes the variable in the same direction.

Step by step solution

Step 1. Dual mandate and bullseye chart

The dual mandate refers to the dual goals of the Fed, which are achieving the targeted inflation rate and unemployment rate. A bullseye chart helps the Fed achieve its dual mandate. The targeted inflation rate unemployment targets are plotted on this chart.

Then, by seeing how close the actual rates are to the center of the chart and whether they have high bullseyes or not, the effectiveness of the Fed in achieving the dual mandate is determined.

Step 2. Southwest and northwest quadrants

If the variable lies to the southwest and northwest from the center, it will give conflicting signals. If they lie southwest to the center of the bullseye, it will mean that both inflation and unemployment rates are below target. If they lie to the northwest from the center of the bullseye, it will mean that both inflation and unemployment rates are higher than the target.

As inflation and unemployment rates face a trade-off, it is impossible to use simultaneous policy for both. If they are less, it increases both as there will be a trade-off between the two.