[Solved] Exercise One: , (a) if The Federal Reserve observes high inflation,... (2024)

FAQs

What will the Federal Reserve do if the inflation is high? ›

WASHINGTON (AP) — The Federal Reserve on Wednesday emphasized that inflation has remained stubbornly high in recent months and said it doesn't plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.

When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

The Federal Reserve institutes a tight monetary policy in order to reign in inflation.

Answer and Explanation: Inflation could be controlled by an adjustment in monetary policy. Implementing monetary policy will increase interest rates, which will reduce the purchasing power and thus lower aggregate demand. Lower demand will reduce prices and thus reduce inflation.

If the Federal Reserve decides to stabilize the inflation rate, it will result in a fall in the actual interest rate with each increase in the rate of inflation. The aggregate demand curve will move to the appropriate to its capacity equilibrium point as a result of the lower real incomes.

The Fed is likely to hold off on cutting rates until later in 2024, with most experts now penciling the first rate reduction for the central bank's September or November meeting, FactSet's data shows.

decrease the money supply to raise interest rates and lower aggregate demand.

A price index measures changes in the price of a group of goods and services. The Fed considers several price indexes because different indexes track different products and services, and because indexes are calculated differently. Therefore, various indexes can send diverse signals about inflation.

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run."

The Fed has several monetary policy tools it can use to fight off a recession. It can lower interest rates to spark demand and increase the amount of money in circulation via open market operations (OMO), including quantitative easing (QE), through which additional types of assets may be purchased by the Fed.

What would the federal government do to attempt to control inflation? ›

To ease inflation, the Federal Reserve works to reduce the amount of money in the economy by raising the Federal Funds rate, which is the interest rate at which commercial banks lend to each other overnight.

The best corrective measure, used by the federal reserve to cure inflation is? The increase in the general price level of goods and services (or inflation) occurs due to increase in money supply and hence it can be addressed by decreasing the money supply or increasing the interest rates directly or indirectly.

Monetary policy primarily involves changing interest rates to control inflation. Governments through fiscal policy, however, can assist in fighting inflation. Governments can reduce spending and increase taxes as a way to help reduce inflation.

This is called contractionary fiscal policy. To reduce the total level of spending, the government could increase tax rates. As more income is collected in taxes, less is available for spending, reducing inflationary pressures. Less government spending would work in the same way.

23. The Fed targets a positive rate of inflation, defined as a sustained rise in the overall price level for goods and services, because a sustained decline in prices, known as “deflation,” can be even more harmful to the economy.

Center for Microeconomic Data

For the third consecutive month, median one-year-ahead inflation expectations remained unchanged at 3.0 percent, according to the March Survey of Consumer Expectations.

An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending.

Right now, the Fed interest rate is 5.25% to 5.50%. The FOMC established that rate in late July 2023. At its most recent meeting in May, the committee decided to leave the rate unchanged. April 30-May 1, 2024.