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Chapter 24: Q. 19 (page 655)
How can monetary authorities target any inflation rate they wish?
Using autonomous monetary policy easing and tightening, monetary policymakers can target any inflation rate.
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As monetary policymakers become more concerned with inflation stabilization, the slope of the aggregate demand curve becomes flatter. How does the resulting change in the slope of the aggregate demand curve help stabilize inflation when the economy is hit with a temporary negative supply shock? How does this affect output? Use a graph of aggregate demand and supply to demonstrate.
In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a 鈥渟oft patch鈥� in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary.
Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to "Percent Change From Year Ago." For the unemployment rate, adjust the frequency setting to "Quarterly." Select the data from through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.
The Problems update with real-time data in MyLab Economics and are available for practice or instructor assignment. 1. On January 19, 2017, the Federal Reserve released its amended statement on longer-run goals and monetary policy strategy. It stated: 鈥淭he Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve鈥檚 statutory mandate鈥� and that 鈥渢he median of FOMC participants鈥� estimates of the longer-run normal rate of unemployment was 4.8 percent.鈥� Assume this statement implies that the natural rate of unemployment is believed to be 4.8%. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), real GDP (GDPC1), and real potential gross domestic product (GDPPOT), an estimate of potential GDP. For the price index, adjust the units setting to 鈥淧ercent Change From Year Ago.鈥� Download the data into a spreadsheet.
鈥淚f the data and recognition lags could be reduced, activist policy probably would be more beneficial to the economy.鈥� Is this statement true, false, or uncertain? Explain your answer.
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