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ECN 253---Inflation, Unemployment, and Federal Reserve Policy
Transcript of ECN 253---Inflation, Unemployment, and Federal Reserve Policy
The two main objections raised are that
(1) Workers and firms actually may not have rational expectations.
(2) The rapid adjustment of wages and prices needed for the short-run Phillips curve to be vertical will not actually take place. Real Business Cycle Models Real business cycle models Models that focus on real rather than monetary explanations of fluctuations in real GDP. During the 1980s, some economists argued that fluctuations in “real” factors, particularly technology shocks, which are changes to the economy that make it possible to produce either more output—a positive shock—or less output—a negative shock—with the same number of inputs, explain deviations of real GDP above or below its previous potential level. Federal Reserve Policy from the 1970s to the Present A Supply Shock Shifts the SRAS and the Short-Run Phillips Curve Paul Volcker and Disinflation Disinflation A significant reduction in the inflation rate. Alan Greenspan, Ben Bernanke, and the Crisis in Monetary Policy • Deemphasizing the money supply. Greenspan’s term was notable for the Fed’s continued movement away from using the money supply as a monetary policy target. Instead of the Fed setting targets for M1 and M2, the Federal Open Market Committee (FOMC) has relied on setting targets for the federal funds rate to meet its goals of price stability and high employment. The importance of Fed credibility. Workers, firms, and investors in stock and bond markets have to view Fed announcements as credible if monetary policy is to be effective. The Decision to Intervene in the Failure of Long-Term Capital Management During 2008, the Fed decided to help save the hedge fund Long-Term Capital Management (LTCM), which had suffered heavy losses on several of its investments.Although some critics see the Fed’s actions in the case of LTCM as encouraging the excessive risk taking that helped result in the financial crisis of 2007–2009, other observers doubt that the behavior of managers of financial firms were much affected by the Fed’s actions. The Decision to Keep the Target for the Federal Funds Rate at 1 Percent from June 2003 to June 2004 The Fed lowered the target for the federal funds rate from 6.5 percent in May 2000 to 1 percent in June 2003. At the time, the FOMC argued that although the recession of 2001 was mild,the very low inflation rates of late 2001 and 2002 raised the possibility that the U.S. economy could slip into a period of deflation. Fun time: Short Review http://www.econreview.com/phillips/us.php Follow