n August 2020, during the Covid-19 pandemic, an article in the Wall Street Journal reported that the Fed was preparing "to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation." The article noted that the policy change would be "a way of essentially telling markets that rates will stay low for a very long time. Markets have ikely already picked up on this change, given the continued declines in long-term interest rates." Why had the Fed previously been following a policy of raising its target for the federal funds rate when it expected that nflation would rise in the future rather than waiting until inflation had actually risen? OA. Monetary policy is ineffective once inflation occurs since it is no longer possible to increase the money supply. B. The Fed wanted to ensure its success in hitting its inflation target, thereby anchoring inflationary expectations. C. Higher inflation rates cause unemployment to rise, making it more difficult to fix the economy with monetary policy. D. The Fed wanted to head off that inflation rather than waiting until inflation rises and then trying to fix the problem. Why would markets interpret this change as indicating that interest rates were likely to remain low for a very long time?
n August 2020, during the Covid-19 pandemic, an article in the Wall Street Journal reported that the Fed was preparing "to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation." The article noted that the policy change would be "a way of essentially telling markets that rates will stay low for a very long time. Markets have ikely already picked up on this change, given the continued declines in long-term interest rates." Why had the Fed previously been following a policy of raising its target for the federal funds rate when it expected that nflation would rise in the future rather than waiting until inflation had actually risen? OA. Monetary policy is ineffective once inflation occurs since it is no longer possible to increase the money supply. B. The Fed wanted to ensure its success in hitting its inflation target, thereby anchoring inflationary expectations. C. Higher inflation rates cause unemployment to rise, making it more difficult to fix the economy with monetary policy. D. The Fed wanted to head off that inflation rather than waiting until inflation rises and then trying to fix the problem. Why would markets interpret this change as indicating that interest rates were likely to remain low for a very long time?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:In August 2020, during the Covid-19 pandemic, an article in the Wall Street Journal reported that the Fed was preparing "to
effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation." The article noted that the
policy change would be "a way of essentially telling markets that rates will stay low for a very long time. Markets have
likely already picked up on this change, given the continued declines in long-term interest rates."
Why had the Fed previously been following a policy of raising its target for the federal funds rate when it expected that
inflation would rise in the future rather than waiting until inflation had actually risen?
A. Monetary policy is ineffective once inflation occurs since it is no longer possible to increase the money supply.
B. The Fed wanted to ensure its success in hitting its inflation target, thereby anchoring inflationary expectations.
C. Higher inflation rates cause unemployment to rise, making it more difficult to fix the economy with monetary
policy.
D. The Fed wanted to head off that inflation rather than waiting until inflation rises and then trying to fix the problem.
Why would markets interpret this change as indicating that interest rates were likely to remain low for a very long time?
A. Historically, when the economy starts to recover from a recession, the Fed ovestimates its inflation target.
B. Historically, when the economy starts to recover from a recession, the Fed raises interest rates to limit that
inflation.
OC. It indicated that the FOMC was expecting substantial policy lags that would prevent it from raising interest rates.
D. The article in the Wall Street Journal is incorrect. The Fed does not abandon its policy once it has been
announced.
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