Should the Fed respond to a shock to spending which is temporary when there are time...
Should the Fed respond to a shock to spending which is temporary when there are time lags in the operation of monetary policy? Why or why not?
Homework Answers
If there are significant time lags in the implementation of monetary policy, and the shock to the aggregate spending is actually temporary in nature, it is probably not significant to take accommodating policy action. This is because if the federal reserve decides to stimulate the economy in case of a temporary recession, by using expansionary monetary policy, the effect of the policy may reach the ground only after the economy recovers itself from recession.
This indicates that it is very much possible that federal reserve may end up over stimulating the economy because by the time the policy start affecting the aggregate demand, the recovery has taken its course and the economy is back to full employment equilibrium. If at this stage, the action of the monetary policy starts affecting the economy it will only create an inflationary gap. Therefore, the federal reserve should not respond to temporary shocks when there are time lags in the operation of monetary policy.
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Should the Fed respond to a shock to spending which is temporary
when there are time...
O Fed is split over time of rate rise In October 2009, the Fed was forecasting...
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O Fed is split over time of rate rise In October 2009, the Fed was forecasting that unemployment will average 9.8 percent in 2010 and said the federal funds rate will remain "exceptionally low" for "an extended period." But some officials were beginning to worry about unwinding the $2 trillion in special credits that have boosted the monetary base and to wonder if the interest rate might need to start rising soon. Source: The New York Times, October 9, 2009...
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For the questions on the following pages, call the initial pre-shock point: A; and call the after-shock point: B. I should see (only) points A and B in both graphs on the left side where you show the shock on the AE curve on the above graph, and on the Phillips curve on the lower graph (both drawn and labeled carefully). In the first part of each question illustrate the shock described in the question using the AE/PC model without...
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