Question

the Federal Reserve Bank has two mandates when setting monetary policy - keep annual inflation around 2% and the unemployment rate around 5%. Typically, efforts to adjust the money supply to cause inflation to decrease causes unemployment to increase and vice versa.

Now, imagine a situation where the United States faces high inflation and high unemployment (stagflation). What do you think the Fed should do in this situation?

Your assignment is submit a 1-2 pages, in which you outline what you think the Fed should do if faced with stagflation. Be sure to include what you think the consequences would be for your proposed actions.

Answer 1

Stagflation is economic or high unemploy ment combined with high inflation. Economic stagnation, high unemployment & recession all indicate the same fundamental Problem: The economy is starved for money. Inflation is felt to be caused by too much money. Stay Flation is mostly occur when Oil prices spike. A rapid increase in oil prices causes inflation. It also has a negative effect on production & economic growth. U.S stagflation could occur, even in the near future, were any major oil producing states, for economic or political reasons, decide to reduce production dramatically. To cure stagflation one must deal with two distinct problems - recession & inflation. - using two distinct solutions. The solution for recession is federal deficit spending. the governments deficit spending adds money the economy caring stagnation Deficit spending can be accompanied by catting takes increasing spending or both.