In the United States, “the Congress established two key objectives for monetary policy - maximum employment and stable prices - in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve's dual mandate” (Federalreserve.gov. January 25, 2012). Question 1 a. In response to the recent strong inflationary pressure, the Federal Reserve conducts a disinflation policy. Using the model of aggregate-demand-aggregate-supply, explain the short run dilemma faced by the Federal Reserve in maintaining her dual mandate when conducting a disinflation policy. Question 2 b. What is rational expectation? Assume the general public has rational expectation. With the sticky-wage model, explain why the dilemma stated in (a) implies a lower cost of disinflation policy. Explain with reference to the shape of the short run aggregate supply curve
Statement
In the United States, “the Congress established two key objectives for
monetary policy - maximum employment and stable
Reserve Act. These objectives are sometimes referred to as the Federal
Reserve's dual mandate” (Federalreserve.gov. January 25, 2012).
Question 1
a. In response to the recent strong inflationary pressure, the Federal
Reserve conducts a disinflation policy.
Using the model of aggregate-demand-aggregate-supply, explain the
short run dilemma faced by the Federal Reserve in maintaining her
dual mandate when conducting a disinflation policy.
Question 2
b. What is rational expectation? Assume the general public has rational
expectation. With the sticky-wage model, explain why the dilemma
stated in (a) implies a lower cost of disinflation policy. Explain with
reference to the shape of the short run
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