The Federal Reserve has an obligation to keep prices stable while promoting full

Question

The Federal Reserve has an obligation to keep prices stable while promoting full employment (a.k.a. the dual mandate). Watch the video and comment. The goal of this assignment is to connect what we've learned so far in the course (especially Chapters 15 and 16) with the real world operations of the Federal Reserve. To ensure originality of responses, you are welcome and encouraged to utilize outside sources to help bring in a new idea to the conversation. In other words, I prefer not to read various paraphrasing of the same couple of ideas from the entire class.

https://www.youtube.com/watch?v=ppXjeRbQq5w

Explanation / Answer

Federal reserve is mandated with the dual responsibility of keeping prices stable as well as promoting full employment.Both goals are equally important from economy's point of view.Now if Fed is able to concentrate on 1 problem at 1 time it could easily fulfil its mandate.Suppose the economy is booming and its facing a severe inflation problem. In that case the fed can easily control inflation by monetary tightening.Similarly in a recessionary phase with disinflation it can achieve its both goals by a monetary easing.

However problem arises only when Fed faces both the problems together i.e both economy is in recession and its facing a problem of persistant inflation.This is because if it resorts to monetary easing this would increase output level but also tend to increase inflation.

However inflation problem might not be totally cured through FED's policies.For example food inflation , inflation propelled due to a rise in international fuel prices and in underveloped economies inflation is also caused by the structure of their economy.When inflation is persistant in an economy due to such factors it cant be cured through Fed's monetary tightening policies.For example food inflation arises due government policies towards farmers, or lack of proper supply chain management or bad weather.In that case required goals cant be achieved through monetary tightening.

Similarly in order to overcome a recessionary situation government should coorporate equally with Fed through its fiscal policies to achieve the required goals.

Fed is incharge of only the amount of money that is supplied in the economy.Both the goals cant be expected to be achieved only through monetary policies, government's role via its fiscal and socio economic policies is equally important in achieving the desired goals.

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