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Question 12 (20 points) The Federal Reserve hus a dual mandate of full employment and price...

Question:

Question 12 (20 points) The Federal Reserve hus a dual mandate of full employment and price stability. Oftentimes this mandat
Question 12 (20 points) The Federal Reserve hus a dual mandate of full employment and price stability. Oftentimes this mandate is challenging as there is a short term fradcoff betweon unemployment and inflation. From 2008 to 2015 nowever, infation was consistently below the target rate while unemployment was well above ils naturaleve Should the Fed have pursued more aggressive monetary policy to raise tilation and lower unemployment? Choose one from below and stale which school of oconomics your answer is subscribing. Then explain your answer using what we have learned in this class A No. Inilation is always bad because it lowers the incentive to invest and we know that vestment that increuses productivity is the orily way to raise living standards in the long run H. No. The Fer exhausted als normal tools and the app topnato por response then is large scale fiscal stimulus. There is only so much tho He can do. C. Yes. The red could have done more and raising inflation to 3 or 4 porcent would havo eased the recovery without long term damage to the economy D. No. Tho Fed should not uver-stimulate the economy by raising inflation and lower unemployment as the current economic situation is quite stable. Rather the Fed should raise the interest rate so thal when there is another rocession, the Fed has an effective tool to use

Answers

Answer - Option C

Yes , the Fed could have done more and rising inflation to 3 or 4 percent would not have caused much damage to economy in long run.

This statement describes the though of the Keynsian school of economics. As per this some amount of inflation , if the rate is not too high is good for the economy. It leads to easy recovery of amount from debtors , and it prevents the economy from the paradox of thrift and the blockage of amount leading to the decrease in AD. Hence the inflation rate could have been raised a bit by the fed and this would have reduced the unemployment rate without causing much harm to the economy.

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