You are a Governor on the Federal Reserve Board. Now indicate to the class what

Question

You are a Governor on the Federal Reserve Board. Now indicate to the class what the last two digits of your phone number are. These numbers will represent the inflation rate and the growth rate of the US economy respectively. Provide your own unemployment rate scenario that would be consistent with these inflation and growth numbers. Given this scenario, discuss the economic situation in the country. Is it an extraordinary economic environment or a rather plausible occurrence in the natural business cycle? Finally, what monetary policy would you want to pursue and why?
You are a Governor on the Federal Reserve Board. Now indicate to the class what the last two digits of your phone number are. These numbers will represent the inflation rate and the growth rate of the US economy respectively. Provide your own unemployment rate scenario that would be consistent with these inflation and growth numbers. Given this scenario, discuss the economic situation in the country. Is it an extraordinary economic environment or a rather plausible occurrence in the natural business cycle? Finally, what monetary policy would you want to pursue and why?
You are a Governor on the Federal Reserve Board. Now indicate to the class what the last two digits of your phone number are. These numbers will represent the inflation rate and the growth rate of the US economy respectively. Provide your own unemployment rate scenario that would be consistent with these inflation and growth numbers. Given this scenario, discuss the economic situation in the country. Is it an extraordinary economic environment or a rather plausible occurrence in the natural business cycle? Finally, what monetary policy would you want to pursue and why?

Explanation / Answer

Inflation Rate - 2%

Growth Rate = 3%

Now, Change in Inflation Rate = -X(change in unemployment)

Change in Unemployment Rate = -Y(Change in growth Rate)

Thus, 2 = -X(change in unemployment)

Change in unemployment = -Y(3)

Thus, by rearranging the above equations = 2/X = 3Y

2/3 = X/Y

Thus, we can say that unemployment reduces by 2% as growth rate increases by 3%

It is an extraordinary business environment. This is because the growth rate in the economy is reducing unemployment at a rate which is faster than the usual rate of reduction.

Now as unemployment is reducing, wages are essentially rising, which means that people now have more cash in hand. In order to control this phenomenon and prevent high inflation levels, contractionary monetary policy should be followed.

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