Respond to each part below using the information provided in each section. A. In
ID: 1106373 • Letter: R
Question
Respond to each part below using the information provided in each section.
A. In 1977, Congress mandated that the Federal Reserve “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. With that in mind, respond to the following prompts:
1. Explain what “maximum employment means” and how the Fed knows whether the economy is operating at “maximum employment”.
2. Explain what “stable prices” mean and how the Fed knows whether it has achieved price level stability.
B. Describe how and why the Fed would modify the Federal Funds Rate under the circumstances described below:
1. Output is at the full-employment level; inflation rises to 5 percent. In your answer, please describe where the economy is relative to the Fed’s dual goals of price level stability and maximum employment.
2.The unemployment rate is 8 percent and the inflation rate is 6 percent. In your answer, please describe where the economy is relative to the Fed’s dual goals of price level stability and maximum employment.
Explanation / Answer
1. Explain what “maximum employment means” and how the Fed knows whether the economy is operating at “maximum employment”.
2. Explain what “stable prices” mean and how the Fed knows whether it has achieved price level stability.
B. Describe how and why the Fed would modify the Federal Funds Rate under the circumstances described below:
1. Output is at the full-employment level; inflation rises to 5 percent. In your answer, please describe where the economy is relative to the Fed’s dual goals of price level stability and maximum employment.
2.The unemployment rate is 8 percent and the inflation rate is 6 percent. In your answer, please describe where the economy is relative to the Fed’s dual goals of price level stability and maximum employment.
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